Is it vital to have corporate governance codes for Institutional Investors & Capital Markets? A case study of Rwanda.

Abstract: There presently is very limited literature and empirical studies that look at the phenomenon and state of corporate governance in Rwanda. Most of the available literature on corporate governance in Africa mainly focuses on South Africa (King Report I, II & III), and not at the emerging economies in the rest of the continent. In particular there has been very limited focus on the implications of having a growing capital market and institutional investors while having no corporate governance mechanisms in place. The purpose of this research is to examine how vital it is to have good corporate governance codes and an implementation mechanism in Rwanda, in light of the introduction and development of a Capital Market, and the growing presence of institutional investors attracted by both the capital market and the privatization process of state-owned enterprises. It involves a review of literature on corporate governance systems as well as a ground approach done by interviewing two experience professionals who are responsible for the government organizations in charge of formulating and implementing corporate governance codes in Rwanda, as well as investor promotion and protection. Based on my research, I found that Rwanda’s amended Company law is strong on investor protection, but there is a non-existent corporate governance code which leaves room for managers to exploit minority shareholders and stakeholders. From corporate governance studies we are able to establish a positive relationship between good corporate governance and company growth & sustainability, and a negative relationship between bad corporate governance and performance, profitability and sustainability. The nature of the legal and regulatory framework has been fundamental in shaping the current corporate governance system. However these formal mechanisms have not been very significant in penetrating to the majority of the businesses in Rwanda which are Small & Medium scale Enterprises (SME’s) and private limited companies. The informal mechanisms have played a key role in shaping the corporate governance structure and provided support in creating a sound corporate governance system. This research seeks to explore the role and impact of institutional investors and capital market on their decision-making and whether it is vital to have a corporate governance code in place to limit their actions.