Boards & Governance in Africa - Background information

Investment outlook for Africa 2011

While some countries in Africa are in serious turmoil or experiencing the ‘Arab Spring,’ many others continue to show stable economic growth. Shanta Devarajan, the World Bank’s chief economist for Africa, expects that direct foreign investment in Africa in 2011 will exceed that of 2010, which at USD 55 billion was a record high.

Sub-Saharan Africa had a 5 percent growth rate in 2010 and is expected to reach 5½ percent in 2011 (Regional Economic Outlook, 2010). African growth is now among the highest in the world, thanks in part to sound economic policies before and during the 2007–2009 global financial crisis. Country authorities were able to leverage fiscal and monetary policies to dampen the adverse effects of sudden shifts in world trade, prices, and financial flows.

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Inflation has also been considerably reduced in many African economies. Domestic demand in the region in 2010 and 2011 is expected to remain strong on the basis of rising real incomes and sustained private and public investment. In addition, exports are expected to benefit from the increased orientation of trade toward fast-growing markets in Asia. But for the coming years, Europe remains the key trading partner for Africa.

The risk from investing in sub-Saharan Africa is similar to that of other emerging markets. The perception that Africa is inherently riskier is not supported by data. On a cumulative basis over the last ten years, African equities have returned 126%, relative to 106% for emerging markets and -23% for G7 countries (MSCI Index Performance, 2009). Assessing investment risks in Africa requires sound data and experience in reading the data, two assets that are not readily accessible to Western investors.

In some cases, direct foreign investments (by China for example) are accompanied by political lobbying and the establishment of transnational partnerships. This may solve issues of corporate risk because the investments are embedded in political insurance mechanisms. But while Europe has traditional ties to Africa, European governments have not adopted a similar role in enhancing and securing European investments. Europe prefers deploying financial mechanisms to promote trade with Africa. And Europe’s trade relations with Africa seem to be more managed by its large multinationals than by its governments.

Corporate governance and Africa’s potential: what’s the deal?

When operating in Africa, European multinationals are good at introducing their corporate management style, bringing in qualified managers, building local human resources and navigating national politics. This model implies a low risk profile, securing direct foreign investments and their financial returns. It requires the participation of experienced board members to lead local daughter companies, people who are able to understand domestic business and political realities, while being able to communicate with overseas investors. This implies advanced stakeholder management skills on the part of these board members.

Qualified board members are therefore key to reducing risk /perception of risk and enhancing investment – not just for multinationals, but also for smaller companies. With better access to investment capital, Africa’s medium-sized enterprises could be booming. Although investment funds for African businesses are mushrooming on paper, real equity investments are well below their potential. This under-exploitation of the promise of medium-sized enterprises in Africa can be explained by the fact that they are perceived as being high risk by foreign investors. This is the result not just of a lack of data, but also of convincing local management qualities and good corporate governance.

Board members can have an impact on both of these deficiencies. Through supervision and coaching, the management of an enterprise can gradually improve itself. Corporate governance can be enhanced through dialogue between board members and adjusting board composition, organization and functioning to the requirements of (foreign) investors