Corporate Governance In Ethiopian Share Companies: What Should The Future Look Like?
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Date
2011-06
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Addis Ababa University
Abstract
In publicly held companies which are formed by contribution of capital from thousands of
sharehold ers, ownership usually separates from the control of disperse d shareholders and goes
into the hands of few managers or few controlling shareholders. Total separation between
ownership and control in turn creates a ri sk of the managers (agent) working for their own
interest at the expense of the shareholders' (principal 's), what is known as agency cost. This
paper posits that the separation between ownership and control is growing in Ethiopia and
acco rdingl y submits some empirical evidence in support of adopting good corporate governance
principles and laws in this regard. Based on the available data and literature on corporate
governance, the paper attempts to show the deficiency in the Commercial Code and other
C' pertinent Proclamations and Directives in addressing current issues in corporate governance
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related to board of directors, protection of rights of minority shareholders and issues regarding
financial reporting, transparency and audit. The analysis of the relevant laws shows that the
overall standard of corporate governance in Ethiopia is disappointing. Accordingly, the paper
provides detailed recommendations based on internationally recognized best principles and
practice s of corporate governance as tht:y are expected to address the specific needs of Ethiopian
share companies .
Moreover, the paper argues that good economic and corporate governance are essential prerequisites
for promoting economic growth and reducing poverty and thus urges policy makers in
Ethiopia to give heightened attention to reform of corporate governance so as to achieve the
same. It also contends that Ethiopia should adopt a mandatory law of corporate governance
instead of a market-oriented corporate governance system to protect shareholder interests from
the abuses and mismanagement of directors and officers and to protect minority shareholders
from the opportunism of controlling shareholders as well as to promote accelerated economic
development in the country. The study employs both primary and secondary data.
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Keywords
publicly held companies which