THE Zambian economy has in the recent years seen repeated and reoccurring incidences of large-scale unusual corporate management practices, creative accounting and strategic decision making practices.
Essentially, these incidences typically involve large corporate organisations acquiring other established companies using management and accounting practices that depart from sound and acceptable practices.
As alluded to in last week’s discourse, one of such practices is the practice of a body corporate of shareholders which appoints a board of directors to perform day to day functions of buying the main input raw material for a named large company.
Additionally, this board proposed and approved a dividend amounting to half of the profits – over K50million in a single financial year, when the company did not have working capital.
The sole purpose of doing all this is to deliberately induce a liquidation so that once this company goes under, elite individuals in the economy can now have leeway to import finished products that this company processes!
Following on this article will build on last week’s discourse, a number of practices that are being perpetrated by legitimate corporations in the guise of carrying out economic development.
The main focus of this discourse is to emphasis sound strategic management and accounting practices as the nation endeavours to carry out its economic reconstruction and growth.
It should be remembered that economic growth does not just occur. It is carried out in legal vehicles, corporate bodies and the like.
These vehicles too, must be seen to be carrying out their programs and activities in a way that promotes professionalism, sound strategic management practices and in a fair, equitable, transparent and accountable manner.
Why should anybody bother about these unhealthy strategic management practices?
In the same way election rigging practices are undesirable in a democracy like Zambia’s, so are economic and strategic management manipulations undesirable in an economy.
In fact, democracy and the rule of law are synonymous with the proper functioning of the principles of the market economy!
This therefore means that a democracy like Zambia increasingly needs to outgrow unhealthy trends in large scale unsound strategic management practices to take root in the main vehicles that the country is using to undertake economic growth.
Three years ago, the Zambian economy saw an increase in “me too, dividend pay-out strategies” in related companies.
There is nothing wrong with generous dividend pay-out strategies.
However, as seen from last week’s case study of a large corporation paying out over K50million of a single year’s profits as dividends when the company does not have any working capital, illustrates how a company’s dividend policy can affect the value of the enterprise.
The policy chosen must align with the company’s goals such as profit retention and growth while maximizing a steady rate of growth on its shareholder’s value.
The Board of Directors needs to take a lot of factors into consideration when making this decision, such as the growth prospects of the company and future projects
A regular dividend policy is used by companies with a steady cash flow and stable earnings. Companies that pay out dividends portray an impression of being low-risk investments because while the dividend payments are regular, they may not be very high.
A company may not give out dividends but could be constantly growing and expanding, and shareholders could still be attracted to invest in them because the value of the company stock is appreciating.
It is important at this point to stress that for such an investor, share price appreciation is more valuable than a dividend pay-out.
The second unusual practice that has been widely seen on the economy is diminishing rational decision making in a number of large scale organisations and institutions.
Rational decision-making process is a school of thought where business or national economic decisions are based on transparent, widely accepted decisions that result from scientific methods of objective processes of information gathering, analysis and evaluation.
This process ensures that the solution reached is fail-proof.
This is because a properly analysed fact-based decision will typically result in a positive and effective economic solution.
In most cases, rational decision making gathers key stakeholders around key sessions of consultative and brainstorming sessions rather than dictatorial unilateral decisions that are merely announced to stakeholders.
How should businesses and respective institutions that are mandated to make business decisions on behalf of the nation make investment or divestment decisions?
What should be the basis of such decisions?
What methods should they use to value the assets of the target companies?
Think of a group of related entities that have been acquired by a parent company and one or two of these entities owe a third party relatively big sums of money in unpaid bills.
What should be the normal practice as a parent company?
Pay off the debt and treat the payment as a liability to the subsidiary?
Or, do you pay off the debt and cherry-pick off the plant and equipment and buildings of the subsidiary, value it yourself and take-over the assets so that you strip-off the assets of this subsidiary and thereafter you declare the undertaking insolvent?
Do you take-over a subsidiary and force it to procure from a related enterprise at a higher production cost?
For Heaven’s sake how and where in the World do you pay-off one liability and pick for yourself his or her assets, give the assets a value by yourself and you quietly take over the assets just like that?
Many a reader would ask, which business school did such practitioners go to?
May I ask once again, where are Policy makers and economic managers when all this rot is going on in the economy?
How does one company determine the cost of production for the subsidiary and where it should produce its goods and services from.
In most cases, the parent will not allow the subsidiary to use its own production facilities but instead direct the subsidiary to use another company’s facilities so that the parent charges the subsidiary
These practices apart from the dividend pay-out, withholding of revenue and the board indulging in day to day procurement of main raw materials have been prevalent in the Zambian economy.
Where do these elite professionals learn such Machiavelli or cunning practices?
Why are such practices taking root in the Zambian economy?
Does anybody care to restore sanity and professionalism in such an ecosystem?
Sound strategic management practices entail that objective information gathering should be undertaken on the proposed decision together with an evaluation of all possible best alternative outcomes.
In the event of decisions to invest or divest it should be clearly noted that every economy operates on the principle of having to allocate scarce resources efficiently.
Therefore, when economic managers choose entity A or B to hold and B to divest, the decision should be based on A having an unquestionable capability over B to for example create value for the economy, or having a higher ability to reduce poverty levels than B and not just a decision from the blues or merely to salvage B’s properties which could be situated in prime areas of the country!
Similarly, corporate boards should increasingly make decisions that would benefit the well being of shareholders and the nation at large rather than those that will simply kill profitable businesses to get them out the elite’s way so that the elite could make the monies that these corporate make.
For comments e-mail: ntumbograndy@yahoo.com Mobile +260977403113 +260955403113
The author is the Managing Consultant at G. N Grant Business Consultant, a Chartered Certified Accountant (ACCA), a Master of Business Administration (MBA) holder, with a Specialism in Strategic Planning, and a candidate for the Herriot Watt University (Scotland) Doctor of Business Administration (DBA)