Financial distress and corporate governance in Zimbabwean banks

Abstract

Purpose

The purpose of this paper is to investigate the relationship between corporate governance failures and financial distress in Zimbabwe's banking sector.

Design/methodology/approach

The study uses the case study method. It discusses cases of banks currently in financial distress. Data collection was through desk research. The analysis is qualitative. Judgemental sampling was used in selecting the eight abridged cases.

Findings

In all cases of pronounced financial distress, either the chairman of the board or the chief executive wields disproportionate power in the board. The disproportionate power emanates from major shareholding. The overbearing executive overshadows other directors, executive and non‐executive, thus creating power imbalance in the board. The study shows that financial institutions in Zimbabwe (as cited in abridged cases) underestimated the competitive forces that resulted from first, economic deregulation and later economic decline coupled with political meltdown. In order to survive, banking institutions significantly shifted from their core business. In all cases the institutions ended up engaging in financial and accounting imprudence. The study also shows that an active role by regulatory authorities directly contributes to observance of good corporate governance practices.

Originality/value

The value of the paper is in its contribution of knowledge in an area that is least researched in Zimbabwe. The paper should be quite useful to academics in terms of understanding developing country corporate governance issues. The paper is also valuable to business executives especially those operating in economies under stress.

Citation

Muranda, Z. (2006), "Financial distress and corporate governance in Zimbabwean banks", Corporate Governance, Vol. 6 No. 5, pp. 643-654. https://doi.org/10.1108/14720700610706126