Board Directors’ Remuneration in Ethiopian Non-Financial Share Companies: Legal  and Institutional Frame Work

Abstract 

This article examines the remuneration of boards of directors in non-financial share companies  under Ethiopia’s 2021 Commercial Code. The objective of this study is to examine the legal  framework and practical implementation of board director remuneration in non-financial share  companies under Ethiopia’s 2021 Commercial Code. The articles adopt a qualitative legal  methodology, integrating doctrinal and comparative analyses of domestic and international norms.  It identifies key challenges, including the absence of robust monitoring by the Ministry of Trade  and Regional Integration, limited shareholder participation, and inadequate transparency. The  study recommends reforming Ethiopia’s Commercial Code to mandate the establishment of  remuneration committees, enforce disclosure of directors’ compensation, and link remuneration to  measurable corporate performance. These reforms would align Ethiopia’s governance practices  with international benchmarks, promote shareholder trust, and contribute to improved corporate  accountability and economic growth. Moreover, it enhancing shareholder engagement,  establishing independent remuneration committees to ensure equitable compensation. 

Key Words: Board Remuneration, Organization for Economic Co-operation and  Development. (OECD), Ministry of Regional and Trade Integration (MOTRI), Share  Company, Shareholder. 

Introduction 

In Company law literature, the concept of company constitutes continuity of life, legal personality,  limited liability, centralized management, share ownership and transferability of shares1. 

Corporate governance is a system of rules, practices, and processes that direct and control a  company, ensuring accountability, transparency, and ethical management. 2It involves balancing  the interests of various stakeholders, including shareholders, employees, customers, and the  community.3 Effective corporate governance is crucial for maintaining trust, enhancing reputation,  and ensuring long-term success. Poor governance can lead to significant financial and reputational  losses, as seen in cases like the Satyam scandal.4 Therefore, strong governance structures are  essential for responsible management and stakeholder engagement. 

The structure of a board of directors typically consists of a group of individuals who are elect by  a company’s shareholder to oversee the management and strategic direction of the organization.  Structure of board director can vary depending on the size and specific needs of the company.5 

Board remuneration should link to performance evaluation and incentives structures, ensuring that  board members are reward for their contributions to the company’s success. This approach  encouraged board members to focus on creating value for shareholder and improving the overall  performance of the organization. In general, board remuneration has a crucial role in corporate  governance, influencing the quality of board members, their decision-making of performance the  organization. By aligning Board members interest with those of shareholder, fostering a culture of accountability and responsibility and ensuring transparency and disclosure, companies can crate  effective governance structures that contribute to long-term success6. 

In Ethiopia, the Commercial Code state directors’ remuneration in non-financial companies is left  to the general meeting. The amount of the share in the net profits that the directors may receive  should not exceed ten percent of the amount that distributed as dividend in that fiscal year.7 The  code lacks clarity on the criteria, process, and institutional mechanisms for determining such pay.  By leaving the decision solely to the general meeting without setting guiding principles or  requiring transparency, the Code creates space for arbitrary or self-interested decisions,  particularly in companies dominated by controlling shareholders. The absence of disclosure  obligations, performance-based assessment, and independent oversight—such as a remuneration  committee—further weakens corporate governance and accountability. This legal gap deviates  from international best practices, such as the OECD Principles.  

Therefore, this paper intends to examine and emphasis on the finding of legal, theoretical and  institutional framework in line with international best standard and principle that ought to be taken  in account of Directors’ remuneration in non-financial share companies. To balances flexibility in  corporate decision-making with safeguards that promote transparency, fairness, and accountability  in directors’ remuneration. To analyze this thesis the researcher, use qualitative legal research  method. 

The Legal Base of Remuneration of Board of Director on Non-Financial Share  Company in line With International Best Standards and Principles When we discuss on International Best Standard and practice the OECD Principle are the well known standard that worldwide acceptance on corporate governance that set rules and principles  to set of guidelines designed to enhance effective framework globally. These principles serve a  bench mark for both member and non member countries to improve their governance practices. 

The OECD Principles were first agreed and issued by OECD member states in 1999 after the occurrence of 1997 Asian financial crisis. To address the concerns of the newly developing markets and corporate governance failures, the principles have been revised in 2004. They incorporated inputs obtained from consultations of five Regional Corporate Governance Roundtables and additional special meetings of 43 non OECD and developing countries. Accordingly, the principles reflected the concern and experience of both the OECD and non OECD members including developing countries. They are designed to provide a specific guidance for policy makers, regulators and market players in their endeavor to improve their legal, regulatory and institutional framework for sound corporate governance. They are also nonbinding standards, principle based and an outcome oriented. Consequently, they can be benchmarked and adapted whether or not a given country’s legal framework is common or civil law and irrespective of the company’s ownership structures and level of economic development. All these make the principles internationally accepted benchmarks and best practices for sound corporate governance. 8Thus, the principles have relevancy to improve share companies’ corporate governance in Ethiopia. 

The commercial code article 426 (3) requires boards’ balance sheet to clearly show the total  amount of remuneration, it failed to align with long run interests of shareholders and the company.  Unless boards ’remuneration policy shows such alignment, shareholders may not properly  determine the boards’ remuneration. This articulate may have potential impacts on the company’s  transparency and may result corporate abuse. 

The Ethiopian framework does not explicitly require performance-linked remuneration structures  for directors and executives. Performance-based pay aligns managerial incentives with company  success, a principle emphasized by the OECD. Ethiopian law could incorporate provisions that  link remuneration to financial and non-financial performance metrics. 

The Ethiopian Commercial Code does not provide specific guidelines or benchmarks to assess the  reasonableness of remuneration. It only set the maximum fee does not exceed 10 percent amount  that distributed as dividend in fiscal year. from Without such benchmarks, there is a risk of excessive  or unjustifiable compensation. The law could adopt OECD-recommended practices, such as  comparing remuneration to industry standards and performance-based remuneration. 

Ethiopian law strongly aligns with the OECD principle of shareholder oversight by empowering the  General Assembly to regulate remuneration. This approach ensures shareholder involvement in  critical decisions and aligns with OECD recommendations. However, shareholder engagement  alone may not suffice without complementary mechanisms, such as independent board oversight  and enhanced transparency. 

The Role of Ministry of Trade and Regional Integration and the Impact of Director  Remuneration on Shareholders. 

Directors’ remuneration is a key aspect of corporate governance, significantly influencing a  company’s performance, accountability, and shareholder trust. In Ethiopia, the Ministry of Trade  and Regional Integration (MOTRI) plays a crucial role in shaping the regulatory framework within  which directors’ remuneration is determined. This discussion examines the Ministry’s role and  evaluates how directors’ pay impacts shareholders. 

The Role of the Ministry of Trade and Regional Integration 

The MOTRI is responsible for regulating trade, enhancing governance in enterprises, and  promoting economic integration. While it does not directly set directors’ remuneration, its  oversight mechanisms and policies impact corporate governance structures, including  compensation practices9. 

The MOTRI develops policies to foster accountability and transparency in corporate governance.  This includes creating an enabling environment for businesses to adopt remuneration structures  that align with global standards: Policies requiring disclosure of directors’ pay ensure shareholders  can evaluate whether compensation aligns with company performance. 10By setting benchmarks  for remuneration, especially in state-owned enterprises (SOEs), the Ministry ensures fairness and  reduces excessive pay disparities. 

The Ministry ensures compliance with Ethiopia’s Commercial Code and other governance  regulations. The MOTRI regulates the remuneration policies in public enterprises to safeguard  public resources and ensure performance-based rewards. The Ministry enforces governance rules  through audits and reporting requirements, indirectly influencing pay practices. While, weak enforcement mechanism often results in limited disclosure of directors pay. Absence of  performance-based pay systems can dilute incentives for enhancing company outcomes. The  Institutional gaps and corporate governance institutions hampers standardization and  competitiveness11.  

In an interview with a legal officer from the MOTRI, the officer elaborated on the role and  responsibilities of the office concerning non-financial SC. He explained that the foundation for  determining remuneration lies within the article of association of the share company. The “Support  and Integration of SC Desk Department” carry out the regulatory oversight.12 

The Officer further stated that remuneration is fixed by the General Meeting and adhere to the  provisions set forth in their articles of association authority. When a conflict of interest arises  among board directors, the department provides legal advice. When its necessary legal decisions  are issued. The office request to calling of a general meeting if more than 10 percent of the  shareholders request it. The department prepares legal brief for the concerned parties. It also  provides legal briefs on Share Holders related matters as needed. 13 

During an interview with the Department of Support and Integration of Share Companies, it was  highlighted that challenges arise when addressing issues related to general meetings and report  submission. The department noted that while they attend general meetings upon invitation and  receive relevant reports, their authority is limited if the company in question refuses to provide the  report, they duty is to observe the meeting. Specifically, the department lacks the legal power to  compel companies to submit these documents.14 

The department recommends that companies hold general meetings within six months. However,  if this does not occur, the department has not taken measurement. They role is to advises preparing  a draft article of association and providing guidance on the relevant provisions of the commercial  code. However, their role remains advisory in nature, because he stated that as the commercial  code does not clearly outline enforcement mechanisms for such situations. This legal ambiguity  highlights a “gray area” in the code, limiting the department’s ability to impose sanctions or take corrective measures15. 

The Ministry has minimal involvement, typically limited to regulatory and licensing roles.  Shareholders or their elected representatives (via the General Assembly) have primary control over  governance, including electing board members and approving remunerations. It role is generally  confined to compliance with trade laws, such as reporting requirements. 

The remuneration of directors in a reflects the boarder challenges of developing corporate  governance systems in emerging markets. Reforming remuneration policy to enhance  accountability, performance linkage and transparency can improve governance and attract  investment. 

The Impact of Directors’ Remuneration on Shareholders in Non-Financial Share  Companies Shareholders are directly affected by how directors are remunerated, as compensation policies  influence corporate performance, governance, and shareholder value. 

Transparent disclosure of remuneration builds shareholder confidence. Shareholders can evaluate  whether directors’ pay reflects their contributions to company success. Transparency deters misuse  of corporate resources and ensures fair compensation practices.16 

Poorly structured remuneration can negatively impact shareholder. Overcompensation of  directors, especially in underperforming companies, erodes shareholder value. Bonuses or fixed  pay unrelated to company performance can lead to short-term decision-making that undermines  long-term growth. When remuneration is tied to performance metrics, such as profitability or share  price growth, directors are incentivized to prioritize shareholder interests. Offering shares as part  of directors’ pay aligns their financial success with shareholder returns.17  the Department of Support and Integration of Share Companies, it was stated that the department  attends general meetings when invited and receives the corresponding reports. However, if a company refuses  to provide the report, the department lacks the authority to demand or enforce its submission. . Nevertheless,  the department’s role is limited to offering recommendations, as there is no clear legal framework for  imposing sanctions or taking corrective actions. This lack of clarity in the commercial code creates a “gray  area” that restricts the department’s ability to act beyond advisory functions. 

The Ministry of Trade and Regional Integration plays a vital role in shaping Ethiopia’s corporate  governance landscape, indirectly influencing directors’ remuneration through policy development,  regulatory oversight, and capacity building. Directors’ pay significantly impacts shareholders,  either by fostering alignment and trust or by eroding value through mismanagement. Strengthening  the Ministry’s oversight and ensuring remuneration policies are transparent and performance based will enhance shareholder confidence and promote sustainable corporate growth.18 

SH are complaining about excessive benefit of directors and founder in the SC but they are lead to  go court rather than getting remedies from MOTRI. There are instances where founders and  directors collect unfair interest and other benefits of shareholders money. If the MOTRI is only  give license, which body regulate them remains unanswered.  

The Commercial Code grants the Ministry of Trade the authority to reduce excessive for  directors who are also founders. This decision must consider factors such as the special benefits  allocated to these directors, the company’s financial position, employee salaries and benefits, and  the stance of shareholders holding at least 10% of the company’s capital. 19This legal provision  emphasizes the Ministry’s obligation to evaluate all relevant circumstances before ordering a  reduction in remuneration. While this approach appears reasonable, it is often overlooked by the  Ministry’s experts as a basis for intervention. Exercising such regulatory authority can have  significant benefits, including resolving disputes early, minimizing unnecessary litigation costs,  promoting good corporate governance in Share Companies, and safeguarding the interests of the  company and its shareholders, while also considering other stakeholders and environmental  concerns. 

The lack of legal framework to supervise the non-financial share company by MOTRI have affect  shareholder rights. Moreover, Director’s remuneration in Ethiopia be influenced by Shareholder  herein after SH however, weak enforcement by the, MOTRI undermines SH rights. A Significant  issue lies in the unequal voting rights among SH, which disproportionately affects minority  shareholders. General Assembly meetings, often the primary forum for SH to influence  remuneration decisions, tend be insufficient for addressing these disparities. Because the lack of access to adequate information and lack of expert knowledge limiting their ability to make  informed decisions or challenge unjust practices.  

The Commercial code does not mandate transparency in the process of setting remuneration nor  does it require the disclosure or shareholders’ approval of remuneration policies and reports. This  lack of regulation limits shareholders and other stake holder in effectively exercising their role in  corporate governance for non-financial share company. A clear remuneration policy would enable  shareholder to make informed decisions regarding remuneration and the approval of related  reports. Without such policy it becomes nearly impossible to establish principles in advance or  evaluate the fairness, objectivity and appropriateness of directors’ remuneration. This absence  contradicts internationally recognized best practices designed to limit the discretionary power of  the responsible bodies in determining remuneration mounts.20 The commercial code fails to  address the need for committees on remuneration, auditing, and nomination which are essential  for fostering a robust corporate governance framework.  

The author observe that The Ethiopian Commercial Code lacks a comprehensive definition of  directors’ remuneration. It only mentions fixed annual remuneration and a share in the company’s  net profits. The NBE directive provides a broader definition, Board allowance, and Director,  employee and Remuneration.21. 

Directors’ remuneration in non-financial share companies is governed by the Commercial Code,  which provides limited regulation. The absence of explicit rules on competence, qualifications,  and remuneration standards leaves room for arbitrary practices. Unlike financial institutions, non financial share companies lack directives like those issued by the NBE, which specify  remuneration guidelines for banks and insurance companies.22 

Directors’ remuneration practices are inconsistent across non-financial share companies. Some  companies tie remuneration to performance, while others pay fixed allowances, leading to  potential inefficiencies and inequities. The fusion of CEO and board chair roles these leads to  companies creates excessive concentration of power, undermining board independence and the  equitable determination of directors’ pay. The lack of mandatory disclosure requirements hinders transparency, making it difficult for shareholders to assess the fairness of remuneration. 

The lack of regulatory oversight and clear remuneration standards poses a threat to the governance  of non-financial share companies. It discourages investment, contributes to “kiosk  mentality”(preference for small-scale personal businesses over share companies),and undermines  confidence in corporate governance. 

Conclusion 

The remuneration of board directors in non-financial share companies under Ethiopia’s 2021  Commercial Code has become an increasingly important area of concern, especially given the  growing need for effective corporate governance. This thesis has examined the existing legal and  institutional frameworks and highlighted the gaps that currently exist in Ethiopia’s corporate  governance system, particularly regarding board remuneration. It is clear from the research that  the current legal provisions are not sufficiently comprehensive to address the complexities of  modern corporate governance in the context of board remuneration. In particular, the lack of clear  and detailed provisions for determining directors’ pay, the limited regulatory oversight by the  Ministry of Trade and Regional Integration and the lack of performance-based compensation  structures significantly hinder the proper function.  

Recommendation 

The Ethiopian Commercial Code should be amended to provide detailed and specific guidelines  for determining board remuneration in non-financial share companies. The revisions should  incorporate a framework that defines performance-based remuneration, fixed pay components, and  the mechanisms for preventing conflicts of interest. Additionally, the law should address the  proportionality of remuneration to company size, industry standards, and the performance of  individual directors. Such provisions would ensure consistency and fairness in determining  directors. 

The Ministry of Trade and Regional Integration (MORTI) must be empowered with broader  oversight capabilities to monitor and enforce compliance with board remuneration guidelines. This  could include requiring companies to submit detailed remuneration reports, conducting periodicaudits, and imposing penalties for non-compliance. Furthermore, a specialized regulatory unit  could be established to handle grievances and disputes related to board remuneration. 

Bibliography 

Books 

• Fekadu Petros Gebremeskel, Ethiopian Company Law, Far East Trading Ltd., Addis  Ababa, (2008 E.C) 

Articles 

• Asnakech Getachew, ‘Revisiting the Ethiopian Bank corporate Governance system : A  Glimpse of the Operation of Private Bank’ (2013) University of Warwick 
• Gebeyaw Simachew Bekele, ’A critical Analysis of the Ethiopian Commercial Code in  Light of OECD Principles of Corporate Governance’ (2012). ICEFREL 
• Hussein Ahmed Tura, over view of corporate Governance in Ethiopia : The Role,  composition and Remuneration of Board of Directors in Share Companies, Mizan Law  review, vol. 6 No1, (June 2012) 
• Understanding Corporate Governance: The 2024 www. imd.org accessed 22 March 2025 Online Journals  
• The Corporate Governance Institute, ‘What is Corporate Governance?’ (The Corporate Governance  Institute, 1 October 2024) https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is corporate-governance/ accessed 22 March 2025. 
• Investopedia, ‘Corporate Governance: Definition, Principles, Models, and Examples’  (Investopedia, 12 September 2024)  https://www.investopedia.com/terms/c/corporategovernance.asp accessed 22 March 2025 

Thesis

• Gebeyaw Simachew Bekele, ’A critical Analysis of the Ethiopian Commercial Code in  Light of OECD Principles of Corporate Governance’ ( LLM Thesis University of London,  2012) 
• Jetu Edosa, Introducing single member companies In Ethiopia, Major Trading and Legal  Consideration (Addis Ababa University School of Law) March 2014 

Reports 

• Ministry of Trade and Regional Integration, Officials Policies and Reports 

Interviews 

1. Interview with Ato Eshetu Wondemu department of Support and Integration of Share  Company in the MOTR. Done at his Office on December 4,2024 
2. Interview with Essayas, Legal Officer of Ministry of Trade and Regional Integration. Done  at the Office on December 4,2024 

International Instruments/ National Laws 

1. OECD Principle of corporate Governance (2015) principle. 
2. The new Commercial code of Ethiopia, (2021), Negari Gazzeta, Extraordinary issues,  proclamation no. 1243/2021,20th year 
3. Commercial Code of Ethiopia ,(1960).

1Jetu Edosa, Introducing single member companies In Ethiopia, Major Trading and Legal Consideration (Addis  Ababa University School of Law) March 2014 p.13 

2 The Corporate Governance Institute, ‘What is Corporate Governance?’ (The Corporate Governance Institute, 1  October 2024) https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-corporate-governance/ accessed 22 March 2025. 

3Investopedia, ‘Corporate Governance: Definition, Principles, Models, and Examples’ (Investopedia, 12 September  2024) https://www.investopedia.com/terms/c/corporategovernance.asp accessed 22 March 2025. 

4 Understanding Corporate Governance: The 2024 www. imd.org accessed 22 March 2025 5 Fekadu Petros Gebremeskel, Ethiopian Company Law, Far East Trading Ltd., Addis Ababa,  

(2008 E.C)

6 Hussein Ahmed Tura, over view of corporate Governance in Ethiopia : The Role, composition and Remuneration  of Board of Directors in Share Companies, Mizan Law review, vol. 6 No1, (June 2012) 

7 The new Commercial code of Ethiopia, 2021, Negari Gazzeta, Extraordinary issues, proclamation no.  1243/2021,20th year, art 304 (1) 

8Ibid n Gebeyaw

9 Ministry of Trade and Regional Integration, Officials Policies and Reports. 

10 ibid

11 Husien Tura, Directors Remuneration in Ethiopia: in the Theory and practice of Directors Remuneration (Koystyuk, A. Stiglabuer and Govorun D Emerald Group Publishing 2016) 187 

12 Interview with Essayas, Legal Officer of Ministry of Trade and Regional Integration. Done at the Office on  December 4,2024 

13 ibid 

14 Interview with Ato Eshetu Wondemu department of Support and Integration of Share Company in the MOTR.  Done at his Office on December 4,2024

15 Interview with Ato Eshetu Wondemu department of Support and Integration of Share Company in the  MOTRI

16 OECD Principles of Corporate Governance 2015 

17 Asnakech Getachew, ‘Revisiting the Ethiopian Bank corporate Governance system : A Glimpse of the Operation  of Private Bank’ 2013 University of Warwick

18 Ibid n Hussien 

19 Commercial code article 304

20 OECD Principles of Corporate Governance. 

21 National Bank of Ethiopia Directives no SBB/67/2018  

22 NBE Directive article 4