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Assignment of Financial Management
(Financial goals and corporate governance issues in Ethiopia)
Submitted By: Dereje Muleta ID No SGSE/203/13
Submitted to instructor: Dr. Arega s.
June, 4

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Abstract
This paper focuses on financial goals and corporate governance issues in Ethiopia. The corporate
governance practice is widely recognized as one of the essential elements in strengthening the
foundation for the long-term economic performance of countries and corporations. The definition
of corporate governance is not provided under the Ethiopian company law, but to a certain extent
considers corporate governance as a system of rules and institutions which determine the control
and direction of a company. The overall standard of corporate governance in Ethiopia is
disappointing. particularly, the legal and constitutional instruments do not provide adequate
legislative; Government own substantial number of business enterprises and operate in key
sectors of the economy; ownership concentration through pyramid structure introduces particular
problems of agency and creates crony capitalism; investor and creditor protection laws are
inadequate; the absence of organized equity market is a serious void.
It is the responsibility of the Ethiopian authorities and the business community to curb the
dysfunctional behavior of corporate managers, and reduce the agency problems trust by adopting
international norms and standards. One key institution that is missing in Ethiopia is a stock
market. This void is a serious deficiency, and makes corporate governance reforms more difficult
than they already are. Allowing sound companies to list in foreign stock exchanges should also
be considered. Creating institutions that could bring business people sustainable profits ought to
be high on their list of objectives. They need to have the courage to experience short-term pain
for long-term gain.

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Contents page
1. Introduction ............................................................................................................................. 1
2. Discussion on Financial goals and Corporate Governance issues in Ethiopia........................ 2
2.1. The nature of Corporate Governance in Ethiopia.................................................................... 2
2.3. Company Law in Ethiopia ....................................................................................................... 4
3. Conclusion .................................................................................................................................. 6
Reference ........................................................................................................................................ 8

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1. Introduction
Corporate governance has become an issue of global significance. The improvement of corporate
governance practices is widely recognized as one of the essential elements in strengthening the
foundation for the long-term economic performance of countries and corporations. It has
received new urgency because of global financial crisis and major corporate failures that shock
major financial centers of the world. Hence, corporate governance has become an important
factor in managing organizations in the current global and complex environment.
Corporate governance can be defined as a frame work that protects stakeholder’s rights by
illustrating an effective board of directors, efficient internal control and audit in addition to
reliable financial reporting and disclosure. The definition of corporate governance is not
provided under the Ethiopian company law. Hence considers corporate governance as a system
of rules and institutions which determine the control and direction of a company. It recognizes
not only shareholders but also stakeholders that should be involved in the governance of share
companies.
There are a number of companies that are being formed by sale of shares to the wider public
unlike most share companies in the past which were formed among founders. The emergence of
publicly held share companies in Ethiopia gives rise to a multitude of issues on corporate
governance. Typically, ownership separates from the control of dispersed shareholders and goes
into the hands of few managers, which in turn creates the principal-agent relationship. In such
situations, agents (managers) may misappropriate the principals’ (shareholders’) investments as
they have more information and knowledge than the shareholders. Where there exist few block
holders in share companies, minority shareholders could be exploited in the hands of such block
holders.
The need for corporate governance arises from these potential conflicts of interest among
stakeholders such as shareholders, board of directors and managers in the corporate structure.
These conflicts of interest often arise from two main reasons. First, different participants have
different objectives and preferences. Second, the participants have imperfect information as to

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each other’s actions, knowledge, and preferences. Corporate governance is intended at reducing
divergence of interest and monitoring of controlling interests of the firm, the absence of which
firm value is declined. There are different mechanisms adopted that safeguard the interests of the
stakeholders. Such corporate governance mechanisms include board size, board gender diversity,
size of audit committee, and board of directors’ educational qualification and experience.
2. Discussion on Financial goals and Corporate Governance issues in Ethiopia
2.1. The nature of Corporate Governance in Ethiopia
Corporate governance is a new issue in Ethiopia context. As to the origin of modern businesses
in Ethiopia, Johannes Kinfu (1990:197), writing on the history of accounting and auditing in
Ethiopia and citing Geiger, states that “small scale Greek, Armenian and Ethiopians, stall
keepers and itinerant peddlers, were in the course of time replaced by Indians, Italians and
Levant wholesalers, distributors and retailers handling a large variety and volume of goods in the
towns; and enterprising merchants and shopkeepers who became to form the basis of the
Ethiopian business sector after 1954.Further notes that modern business enterprises were
established as branches of foreign enterprises.
Notwithstanding the historical evidence of modern business, the companies with substantial
capital, in one way or another, were created through a mix of public and private partnership.
The Commercial Code of Ethiopia (hereinafter the Commercial Code) incorporates provisions
pertinent to the governance of share companies. However, such provisions are inadequate to
address specific issues in corporate governance related to board of directors such as separation of
roles of nonexecutive directors and CEOs, composition and independence of the board as well as
director’s remuneration. Moreover, proclamations and directives governing financial share
companies in Ethiopia do not sufficiently address the aforementioned issues.
According to Fekadu Petros (2010) underlines the growing separation between ownership and
control in Ethiopia, and he submits some empirical evidence in this regard. Relying on the data
and literature on corporate governance, he shows the deficiency of the Commercial Code in
protecting the rights of minority shareholders in the context of publicly held companies.

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Global evidence, from the World Economic Forum's (WEF) Competitiveness Report to the
World Bank's enterprise surveys, shows that Ethiopia is one of the poorest performers in terms of
establishing a strong corporate governance culture in the business environment. Both reports, for
example, show that accounting standards in the country are way below that of Sub-Saharan
African countries. It is certain that the low quality of books of accounts will translate into low
interest for investments when it comes to final decisions.
Unlike its neighbors, Ethiopia still neither has a stock market nor is its firms allowed to be listed
in foreign stock markets.
2.2. Significance of Corporate Governance to Ethiopia’s Economy
Corporate governance issues have attracted attention in government policy circles, the academia
and the popular press throughout much of the world.
Corporate governance is recognized for:
 Laying down the framework for creating long term trust between companies and the
external providers of capita,
 Improving strategic thinking at the top by inducting independent directors who bring in a
wealth of experience and a host of new ideas,
 Rationalizing the management and monitoring of risks a firm faces globally,
 Limiting the liability of the top management and directors by carefully articulating the
decision making process,
 Ensuring the integrity of financial reports and
 Helping to provide a degree of confidence that is necessary for the proper funding of the
market economy.
More generally, the ability of countries to attract foreign capital is affected by their systems of
corporate governance and the degree to which corporate management is required to respect the
legal rights of lenders, bondholders, and non controlling shareholders. Individual and
institutional investors will refrain from providing capital or will demand a higher risk premium
for their capital from enterprises in countries without effective systems of corporate governance.
International investment not only provides corporations with expanding sources of capital, but
also encourages the continued integration of sound corporate governance practices which may

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help the corporations to gain the trust of investors, reduce their capital costs and induce more
stable financial sources.
Over the past few years, Ethiopia has experienced a number of encouraging economic gains. In
2010 alone, private banks declared a net profit of Birr 1.4 billion after paying Birr 575.4 million
in profit tax. Approximately 5,000 companies representing share companies and private limited
companies are registered, and this figure does not include state owned enterprises. During the
month of March 2010, the total number of banks, insurance companies and microfinance
institutions (MFIs) stood at 15, 12 and 30, respectively.
At present, Ethiopia has launched an ambitious Growth and Transformation Plan (GTP) to
double its current GDP by 2015. While these figures are promising indicators of the country’s
economic progress, private and public investment is crucial in the country’s economic
development objectives. Economic development, which is a key prerequisite for reducing
poverty and creating wealth, presupposes the fundamental requirements of effective regulatory
framework and good corporate governance. Corporate governance may also lower the costs of
capital by reducing the ‘risk premium’ normally added by creditors to borrowing. Application of
good standards to company’s affairs improves the control of business transactions and increases
efficiency.
Ethiopia’s developmental and poverty alleviation pursuits require stronger enterprises that can
generate and increase employment opportunities, produce goods and services and create profit
for the investors. This envisages continuous investment of capital and human resources as well
as consumer satisfaction and public confidence in the enterprises. To achieve these objectives,
companies must have good and effective system of corporate governance and must also be
perceived to be properly managed.
2.3.Company Law in Ethiopia
In market economies company law plays a significant role in setting the legal environment for
the creation and continuing operation of privately owned businesses. It can encourage new
investment and provide investor protection by setting forth clear and objective rules for a
company’s internal governance. It can also enhance entrepreneurship by making it easy to start

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up and register a company, and encourage businesses to come out of the underground economy
into the publicly registered, taxpaying economy.
Publicly held companies are referred to as share companies in Ethiopia’s Commercial Code.
Even though all companies (including financial institutions) have to adhere to the provisions of
the Commercial Code to operate in the country, financial companies have other proclamations
and subsidiary directives that require them to comply with additional requirements.
Accordingly, share companies engaged in banking have to comply with the Banking Business
Proclamation No.592/2008 and the directives and procedures issued by the National Bank of
Ethiopia (NBE). Insurance companies are required to comply with the Licensing and Supervision
of Insurance Business Proclamation No.86/1994 and directives and procedures of the NBE.
Micro financing Institutions are governed by Proclamation No.626/2009, NBE directives and
procedures issued by the NBE. These specific laws apply to financial share companies in
addition to the Commercial Code.
The non-financial share companies operating in Ethiopia have to comply with the provisions of
the Commercial Code. Pursuant to Article 304 of the Commercial Code, a share company is a
company whose capital is fixed in advance and divided into shares and whose liabilities are met
only by the assets of the company. While the minimum is five, there is no limit as to the
maximum number of persons who may be members of a share company. Compared to private
limited companies, which are prohibited from undertaking banking, insurance and any other
financial business activities, there is no limit as to the kind of business activity that share
companies may engage in. It is worth noting that certain provisions of the Commercial Code, as
applied to share companies and other forms of business organizations have been amended on a
case by case basis. A case in point is the Commercial Registration and Business Licensing
Proclamation No.67/1997, which has been amended several times and recently replaced by the
new Commercial Registration and Business Licensing Proclamation No.686/2010. It provides
additional rules on the formation and registration of share companies and other business
organizations.

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In general, share companies are governed by the relevant provisions of the Commercial Code,
and by the specific proclamations issued regarding financial share companies, and other general
and specific laws that have bearing on the operations of such companies.
3. Conclusion
Based on the reviews of financial goals and corporate governance issues in Ethiopia the
following conclusions are provided:
 The overall standard of corporate governance in Ethiopia is disappointing. More specifically,
the legal and constitutional instruments do not provide adequate legislative; key international
conventions and standards are not ratified; Government own substantial number of business
enterprises and operate in key sectors of the economy; ownership concentration through
pyramid structure introduces particular problems of agency and creates crony capitalism;
investor and creditor protection laws are inadequate; the absence of organized equity market
is a serious void.
 It is the responsibility of the Ethiopian authorities and the business community to curb the
dysfunctional behavior of corporate managers, and reduce the agency problems trust by
adopting international norms and standards. One key institution that is missing in Ethiopia is
a stock market. This void is a serious deficiency, and makes corporate governance reforms
more difficult than they already are. Allowing sound companies to list in foreign stock
exchanges should also be considered.
 Indeed, competing with companies as complex as states, and even more, demands Ethiopian
businesses to have strong structures and working procedures. This is not a tide that could be
sailed through by the use of the traditional systems they remain to use. It rather demands a
considerable leap in corporate governance elements, such as policies, laws, institutional
arrangements, culture and values.
 Improving their corporate governance structure, business will be able to enhance their
sustainable profitability. They could take themselves away from their volatile state to one
with solid institutional bases. Shocks, both external and internal, will have little impact on
their sustainability.

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 A business sphere filled with companies having reliable corporate governance attracts
investment. It could contribute its deserved share to the growth of the economy and related
economic aspirations, such as full employment. Since risks will be minimized, then, returns
on investments will be higher.
 Recently, there have seen some efforts by the state to push for better practices of shareholder
treatment, boundaries of financers, roles of broads, ethical business practice and public
disclosure. But a lot remains to be done to elevate the whole practice up to globally
competitive standards.
 If anything, the focus ought to be on changing the attitudes of businesspeople and
policymakers on the advantages of strong corporate governance. This, however, ought to not
push aside the importance of putting into place stringent corporate governance regulation
instruments. No doubt that this ought to be one aspect that the latest efforts of trade policy
preparation and trade packaging, being undertaken by the Ministry of Trade (MoT), take into
account.
 Needless to say, a large proportion of the responsibility lies on the shoulders of
businesspeople. Creating institutions that could bring them sustainable profits ought to be
high on their list of objectives. They need to have the courage to experience short-term pain
for long-term gain.

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Reference
Ayele, A.G. (2013) ‘Revisiting the Ethiopian Bank Corporate Governance system: A Glimpse of
the Operation of Private Banks’, 2013(1) Law, Social Justice & Global Development Journal
(LGD).
Gebeyaw Simachew (2012). A Critical Analysis of the Ethiopian Commercial Code in Light of
OECD Principles of Corporate Governance Framework, Institute of Advanced Legal Studies
School of Advanced Study University of London.
Minga Negash (2008). Rethinking Corporate Governance in Ethiopia, School of Accountancy,
University of the Witwatersrand.
Wolday Amha(2008).Corporate Governance of the Deposit Taking Microfinance
Institutions(MFIs) in Ethiopia, The Association of Ethiopian Microfinance Institutions (AEMFI)
Addis Ababa, Ethiopia.
Yenesew Ferede(2012) The Impact of Corporate Governance Mechanisms on Firm's Financial
Performance: Evidence from Commercial Banks in Ethiopia, The Department of Accounting and
Finance, Addis Ababa University.
allAfrica.com. June 30, 2014.