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The upcoming Ethiopian Capital Market and the changing role of the Chief Finance Officer – high time to keep the house in order!

The Ethiopian Government passed a law to set up a local capital market with a clearly said aim of developing the national economy through mobilizing capital, promoting financial innovation, and sharing of investment risks. The Government has also setup a project team which has been working to draft proper directives for approval by the Board of Directors of the Capital Market Authority to supply detailed guidance and requirements to enable the effective implementation of the Capital Market Proclamation. Adhering to the capital market laws and the Board’s directives will primarily rest on those who seek the services of the capital market.
The Board of Directors of companies and CEOs aspiring to get their companies listed on the stock exchange, need to be initiative-taking in keeping their house in order so that the companies they list at the stock exchange can be sought-after companies for investment. Doing a good homework will also aid companies to get proper valuation of their shares during Initial Public Offerings (IPOs). Appropriate valuation of floated shares significantly benefits shareholders.
Once listed, companies need to regularly supply all required information to the market. Although there are diverse types of market intermediaries that work on public information and conduct their own due diligence, the existence of these intermediaries does not absolve the companies from their responsibility to provide timely, accurate and reliable information to the capital market. This will remain a continuous job of companies planning to do business in the market.
The size and importance of the task requires the assignment of the responsibility to a senior leader of management who is conversant with financial matters and can effectively function as the face of the company in the market. In many public companies, this role is filled by the Chief Finance Officer, Finance Director or sometimes Head of Finance. For this Article, I refer to this person as Chief Finance Officer.
To date the role of the Chief Finance Officer (CFO) or its equivalent in Ethiopia is limited to keeping and recording daily financial transactions, being a custodian of cash, paying taxes, dealing with the providers of finance, particularly with banks, preparing budgets, preparing internal and external financial reports and, to limited extent, keeping the financial health of the company through management of liquidity and solvency. However, in the rest of the world, the role of the CFO has significantly evolved over the last four decades and CFOs have become the most powerful executives next to the CEO often overtaking chief operation officers of many giant global companies.
When Ethiopian companies enter the new game and companies start getting listed in the stock exchange, the role of CFOs which have so far been limited to back-office functions need to be significantly enhanced with added and critical roles that are expected by the capital market. In this new setting, there should be little routine in the day-to-day duties of a CFO. CFOs need to streamline the systems and delegate the functions that perform standardized, high-volume processes, and shift their attention to high-level strategic issues that add value and competitive position of their companies. Among other things, this will require engaging with system experts and consulting firms to redesign the routine transactional processes which have been consuming the time of CFOs so far. Once this is done, CFOs will get time for high level work of planning, investment analysis, merger and acquisition, (which most local CFOs have none or limited experience), etc.
In relation to capital market, the CFO is responsible to submit quarterly and annual reports to the market on time. As described above, existing processes need to be streamlined and automated so that the CFO can quickly review and submits the quarterly report. In addition, unlike internal management reports which do not have a governing standard, external financial reports to be submitted to the market need to comply with acceptable financial reporting standards.
In Ethiopia, the International Financial Reporting Standards (IFRS) are adopted by the Proclamation issued in 2014 to become the national financial reporting standard to be complied by all public interest entities. Although the definition of a “public sector interest entity” as presented in the directive issued by the regulator – the Accounting and Auditing Board of Ethiopia – goes beyond listed companies in the stock market, listed companies will be specifically required to apply IFRS. So far, some of the public interest entities including financial institutions have converted their financial reporting framework to IFRS with the support of consultants. From now on, however, keeping abreast with the Standards and ensuring that financial reports are prepared accordingly and regularly need to be the key duties of CFOs. It should be noted that, compliance with IFRS is beyond the usual routine tasks that dominate many finance functions in the country now. CFOs need to ensure that a fully qualified accountant such as ACCA is placed within the Finance function. In the short and medium term, however, CFOs can get this support from reputable and knowledgeable audit/accounting firms which will significantly ease their burden of effective compliance with IFRS.
One of the criticisms leveled against capital markets is that they create a conducive environment for some actors to pursue short term-objectives at the expense of long-term growth and sustainability. Capital markets expectation from listed companies is a consistent increase in share price and pay-outs to investors. This is a battle to be fought by listed companies all the time. The CFOs need to balance the long-term interests of their companies against the temptation of satisfying the short-term whims of the market. In addition, CFOs should also protect their companies from hostile takeover.
In modern capital markets, it is not the CEO but the CFO who acts as a spokesperson to the markets on investors conference calls, at public presentations and in the media. Hence, CFOs are expected to be excellent communicators. Considering the backgrounds of many CFOs in Ethiopia, it is high time to ensure that companies that plan to list in the upcoming capital market arrange extensive media training to their CFOs.
Many companies in the country do not have a specialized function such as the Office of Strategy Management that leads the company’s strategy design and follow up for effective implementation. In the absence of this function, it can be argued that CFOs are best placed to steer a company strategy because of the significant useful information at their disposal and their training which emphasizes a data-driven approach to decision making. To raise themselves to the occasion and meet their big picture role, however, CFOs need to fight the old stereotypes surrounding the function which include number obsessed, penny-pinching, control freaks, bean counters and prove themselves that they can indeed think and act strategically beyond numbers and supply evidence based strategic insight. CFOs need to balance the tension between conservatism and control on the one hand and driving the business by partnering with operation leaders on the other hand, to promote growth of the companies they serve.
In conclusion, the maturity level of the finance function of most companies in the country, including that of many financial institutions, has a long way to go before it can achieve a world class status. In my view, companies that aspire to list in the upcoming capital market need to revisit their traditional finance function and embrace the changing roles of the CFOs in a capital market setting now rather than later. Following a deep due diligence on current practices of companies, it is possible to re-organize a world class finance function that reflect best practices within three to five years.

Solomon Gizaw is Chairman and CEO, HST. The views expressed in this Article are his personal views and do not represent the views of HST and its partners and directors.


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