Ethiopian businesses were living in a silent world, hiding their secrets behind closed doors.
That was, and still is to some extent, the culture of doing business in Ethiopia. Many companies are family-owned, strong centralized administration is persistent, and one’s close-knit networks dictate the trajectory of the company, but now everything is about to change.
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As businessmen preparing to compete with foreign multinationals, listing their companies on the ESX seems like their gateway to growth. Working with ESX is quite different from running a private company. For example, ESX has introduced new rules and guidelines that require companies to be more transparent. This means that companies must provide clear information on their financial health, operations, and decision-making processes. In other words, companies must now publish regular financial reports and disseminate relevant data to shareholders and potential investors.
Historically, companies resisted public scrutiny as it shed light upon documents that could deteriorate reputation, profit, or even information that competitors could use to assert their dominance. The establishment of the ESX is changing this equation. To list shares publicly, companies must meet rigorous requirements: publishing audited financial statements, appointing independent board members, and reporting material information regularly. For a market that has made secrecy its way of working, it is a hard pill to swallow, but for the Ethiopian Capital Markets Authority (ECMA), these rules are designed to “build investor trust and safeguard market integrity.”
Although the workings of ESX are peculiar to what businesses are used to, some are willing to adapt. In efforts to meet the capital quota of the National Bank, Wegagen and Gadaa Bank are now the only two listed companies. To adhere to ESX requirements, both have released interim and audited full-year financials, something that was a rarity. Beyond the reforms that we can see on paper, leaders have realized that the days of owner-led firms are coming to an end. Both banks have restructured boards to include independent directors, established investor relations teams, and now hold annual general meetings (AGMs) with shareholder voting.
For a market that was closed off for so long, it takes a while to adjust to public scrutiny. The structure of these organizations is made to protect, not reveal information. For true public security to be achieved, it will take time and effort from both parties.
Additionally, there is a capability gap in financial reporting. A gap that became more pronounced when ECMA asked both Gadaa Bank and Wegagen Bank to report their prospectus themselves due to “misinterpretation of listing requirements and a dearth of qualified investment advisors in the country,” as Solomon Kitata, senior advisor at ESX, put it. This is a deviation from international norms, where usually an externally hired auditor conducts the job.
In Ethiopian culture, it is believed that information that has the slightest hint of personal detail should be kept to oneself. This has found its way to business. Some founders still resist disclosing what they once considered a private family business, and this cultural mindset makes adapting to public scrutiny and governance rules even more challenging.
Even though listing on ESX is a tedious process, it allows companies to reach millions of people at once, making the process of raising capital a bit easier. Moreover, as companies become more transparent, it may increase company reputation and increase in shareholder trust. As a company becomes more transparent, the more attractive it is for foreign investors and vice versa. As a 2022 report from the African Development Bank (AfDB) noted that an international investor may be prepared to sacrifice a fundamentally good investment if the investor has little confidence in the disclosure standards of the market.”
As companies eagerly turn towards ESX as a way to raise more capital, they are forced to adhere to international corporate governance standards, making ESX a catalyst for change in the Ethiopian corporate culture
Change in Ethiopian corporate culture is long do and especially important for fostering a sustainable capital market. By embracing openness, Ethiopian companies can break the silence for a stronger financial system that attracts local and global investors for years to come.
