Ethiopian Business Review

Short-termism, Sustainability of Financial Institutions

Considering the existing reality in the Ethiopian finance sector, one may propose that an excessive short-term focus by some boards of directors, corporate leaders and shareholders combined with insufficient regard for long-term strategy can cause an imbalance in the companies’ long term and sustainable growth. Particularly, shareholders represented by a board of directors typically affect company operations and decisions differently than other stakeholders concerned with the business.

 

In every corner of the world, there is a rapid increase in shareholder activism which is demonstrated in their dominance and influence on corporate governance issues as well as long term business continuity. Most people squabble that the impact and pressure put on CEOs to deliver short term results, mainly high profit margins and dividend, is becoming higher than ever before. 

Short-termism refers to a disproportionate focus on short-term results at the cost of long-term interests and sustainable growth opportunities that require devoting some part of current returns to long term investments. Due to short-termism, financial companies in Ethiopia are competing with each other to register high profit, sometimes by implementing excessive service charges and non-value adding services for their customers. 

Some CEOs argue that the pressure for doubling profits is mounting and no one has asked them about long term plans. This in turn is creating a burden on the overall growth of the industry in general, that requires working on financial inclusion and aggressive financial literacy throughout Ethiopia. Given this, one could ask why shareholders and boards of directors put unnecessary pressure on CEOs and management to maximize short term goals over long term ones.

Among others this may be due to the awareness level of board of directors that may be elected because of their shareholdings and minimum fit and proper requirement set by the regulator, the National Bank of Ethiopia (NBE). For instance, regarding knowledge and experience of board of directors, the NBE’s Directive on requirements of persons with significant influence allows 45Pct of the Board members to come from an academic background of competing only general secondary school or its equivalent. Although the directive requires financial companies to provide adequate trainings on sector specific knowledge, most barely implement it in providing trainings that are capable of giving strategic insights for board of directors.

The difficulty with short-termism in many ways is that it does not ensure long term results for shareholders and it also limits the vision of the companies to only run after profit and become myopic to strategic issues. While the majority of company leaders prefer to remain peaceful with their board and high dividend demanding shareholders, the windfall businesses they get may not benefit the shareholders in the long run and the services that the society seeking may not be realized

Here, unless the CEOs fight to shift the attention of their board and shareholders toward “strategically right” investments, the long-term health of the companies will be compromised. Hence the growth of the financial sector in serving the future of the country becomes stifled.

Shareholders are the owners of a business and are the ultimate decision-makers on the direction of a company. While the management of a company has the day-to-day decision-making power, shareholders guide the strategy, financing and selection of management of the firm. In many cases, shareholders are the management of the firm. Shareholders also receive the benefits of dividends and the appreciation of the company’s value. However, they also are responsible for the liabilities of the firm and the risk of the value of the company dropping to zero. On the other hand, the board of directors is the legal representative of the shareholders. The board has several duties, including providing continuity for the firm, selecting the managers, assuring the firm is sufficiently financed, providing guidance on policy and strategy and reporting to the shareholders

Looking forward

Companies must put purpose before short term profit so as to serve the public and ensure healthy and sustainable growth of the financial sector. Moreover, in most Annual General Meetings of shareholders, companies should allocate time to engage in constructive dialogue with shareholders and the Board in areas that affect the long term interest of Companies.

It is known that profitability also is important in attracting and retaining stakeholders. However, Companies that have historically had a single primary objective of maximizing profit should also try to look for other areas, especially long term sustainability through investing on the future. Somebody must stop or reduce such impacts. Regulations designed to help shareholders hold top executives need to be revised to enable capable people sit in the board room.


8th Year • Jan.16 - Feb.15 2019 • No. 70


 

 

Fikru Tsegaye

Fikru Tsegaye holds MBA in Marketing and MA in Human Resource and Organizational Dev’t. He is currently working at Ethiopian Insurance Corporation as Marketing and Strategic Management Team Leader. He can be reached at fikru.tsegaye@yahoo.com

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