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looking at corporate governance in Kenya

Corporate   governance   as   an academic study is  a  highly  dynam- ic field. although its fundamen- tal    principles   are   immutable,

the manner in which different scholars approach it varies greatly. Consequently,  the implications for industry (directors and managers)  also vary.

scholars generally agree that corporate governance involves the processes, policies, structures and actions employed by  a  board to oversee and monitor an organiza- tion so that it can achieve its objectives. It  is concerned with who controls what, and how well they are doing  it.

another widely accepted view is that corporate governance is the manner and system by which  power  in  a  corporation is exercised in the stewardship of its total portfolio of assets and resources in order  to secure and grow shareholder value and satisfy the interests of  other  stakehold-  ers such as employees, suppliers and the broader society.

When corporate  governance  became  a standalone discipline and boards  start- ed  taking  it  seriously,  the   initial   areas of concern were financial reporting and separation of powers, especially between chief executives and chairpersons who sometimes accrue too much political cap- ital within their organizations. scholars unanimously agreed that boards needed to address these issues in order to safeguard shareholder value.

Where the big scholarly debates came in was the extent to which a business was responsible to other stakeholders, especial- ly  the  broader  society.  Certain  aspects  of

corporate  governance,  such  as  corporate

social responsibility which is  concerned with the organization’s duty to society, continue to provoke debate among schol- ars.

Renowned economist and Nobel Prize Winner, the late Milton Friedman (1912- 2006), very early in the debate on corpo- rate social responsibility maintained that the use shareholder’s funds beyond the means of making a profit is a misuse of funds.

Friedman’s view has, of course, been challenged through the years and a differ- ent view has emerged in recent times. the vast majority of organizations today view themselves as corporate citizens, arguing that what they do for the society using shareholders’ funds ultimately benefits shareholders by creating a more favorable operating environment and building good- will. goodwill is an asset that can help a brand grow sales without spending much on marketing, increasing profit margins for the business and benefiting  shareholders.

this diversity in terms of views is  what makes corporate governance highly dynamic. Emerging global issues such as technology and falling trade barriers have also forced boards to adopt new outlooks on issues and introduce new measures to safeguard shareholder interests. this has introduced yet another layer of complexity to the field of corporate governance.

the constant changes in the discipline of corporate governance, and the continual academic research needed to make sense of these changes, present somewhat of a barrier to organizations that would   wish

ernance structures.

the barriers to instituting sound corporate governance structures notwithstanding,  the  significance of proper corporate governance in Kenya cannot be overstated. the country  needs  good   governance in order to attract foreign invest- ment amid high competition from its neighbors, especially tanzania, which has gone  to  great  lengths  to put out an image of integrity since the election of President John

technology and falling trade barriers have also forced boards to adopt new outlooks on issues and introduce new measures to safeguard shareholder interests.

tries have also not escaped the  drive

in the world for greater transpar- ency and accountability,” he added, indicating that corporate governance remains indispensable if  countries like Kenya are to attract investment in the current global business land- scape.

 

Capital markets

Kenya has some distinct  compet- itive advantages that make  it  an ideal  investment  destination.  It  has

capacity  to  safeguard  their   money.

the Kenyan government and the Capital Markets authority (CMa) have initiated policy reforms to improve business competitiveness and strengthen capital markets, respectively.

Kenya’s focus on strengthening capital markets, which falls under the CMa’s domain, took center stage in the aCgN report. the reason why listed firms should be the first to fol- low a strict governance code to understand and implement sound corporate governance practices. this is not only because of skills gap, but also because of financial constraints, especially in an environment like Kenya where majority of businesses are informal and family owned and as such lack the resources to develop and implement sound corporate governance structures.

the barriers to instituting sound corporate governance structures notwithstanding,  the  significance of proper corporate governance in Kenya cannot be overstated. the country  needs  good   governance in order to attract foreign invest- ment amid high competition from its neighbors, especially tanzania, which has gone  to  great  lengths  to put out an image of integrity since the election of President John

Magufuli.

“It is a truism that investment   is attracted to an area where good corporate governance is practiced,” observes Mervyn E. King, african Corporate governance Network (aCgN)    ambassador     Chairman of the International Integrated Reporting   Council.  “african   countries have also not escaped the  drive

in the world for greater transpar- ency and accountability,” he added, indicating that corporate governance remains indispensable if  countries like Kenya are to attract investment in the current global business land- scape.

 

Capital markets

Kenya has some distinct  compet- itive advantages that make  it  an ideal  investment  destination.  It  has a highly developed financial system relative  to  other   african   markets. It has also made several improve- ments  with  regard  to  the  ease    of doing business, ranking among sub-saharan africa’s most competitive economies in the World Economic Forum’s global Competitive Index.

But for Kenya to leverage  on these strengths and attract invest- ments, it needs to do more. It needs to assure investors that it has the functional framework as well as    the capacity  to  safeguard  their   money.

the Kenyan government and the Capital Markets authority (CMa) have initiated policy reforms to improve business competitiveness and strengthen capital markets, respectively.

Kenya’s focus on strengthening capital markets, which falls under the CMa’s domain, took center stage in the aCgN report. the reason why listed firms should be the first to fol- low a strict governance code

is obvious.

Listed firms are the ambassadors, as it were, for corporate Kenya. How they are run gives potential investors an idea of how other non-listed com- panies and institutions in the broad- er economy are run. this explains the recent sharp focus on instituting sound governance structures in the capital markets.

In the past, some listed firms have undermined Kenya’s interna- tional image as far as corporate governance goes. Board wrangles have been very common. there have also been cases of negligence where boards were not able to nab rogue executives beforehand. this came out quite clearly in 2015 when list- ed retailer uchumi was involved in manipulation of books to the tune of sh1.04 billion under the watch of former CEO Jonathan Ciano, accord- ing to a forensic report by audit firm KPMg.

“there is some evidence of poor governance practices in the (Kenyan) listed company sector in the form of governance scandals and boardroom wars that have tended to follow years of alleged poor corporate gov- ernance, corruption and misman- agement of investor funds requiring the intervention that has put the reputation of the Capital Markets authority (CMa) to the test,” aCgN notes in its report.

In response to this, the CMa has officially introduced a new code that shows a lot of promise with regard to dealing with some of the issues that the previous code did not address. the new code, introduced in 2016, will for example require companies listed on the Nairobi bourse to dis- close the reasons behind the exit of their board members and top man- agers such as chief executives and chief finance officers.

about a dozen top executives have exited NsE-listed  firms  in  recent years after facing allegations of  professional  misconduct   ranging

from falsifying books and poor man- agement decisions. Firms, however, have long made a practice of sugar- coating the reasons for executive and board member exits, throwing around terms such as “for personal reasons” rather than telling it as it. the provision in the new cor- porate governance code requiring listed firms to disclose reasons for executive and board member depar- tures could effectively help put rogue executives on the corporate   blacklist instead of making them another organization’s problem.

the new code also requires pub- licly traded companies to adopt a pay-for-performance formula for remunerating board members and top managers such as chief executive officers (CEOs) and chief finance officers (CFOs). the  remuneration of executive directors shall also include an element that  is  linked to corporate performance. this new provision means that top executives and directors will now work harder to ensure consistent profit growth, securing shareholder value.

another key measure introduced in the new code is that directors of publicly listed companies will  need  to disclose  their  pay  to  the  pub-  lic. Executive directors will also be required to have some shareholding in the companies they serve.

all these new measures are meant to increase accountability at the board and  top  management  level. If followed, they could greatly enhance Kenya’s image among foreign investors. ultimately,  the  real  litmus   test   will  be whether the judiciary,  which  has long received negative publicity due to endemic corruption, will follow up on those who flout the new regulations.

Emerging trends

Important as the CMa’s new corpo- rate code is, it is imperative that regu- lators and corporates remain constantly aware of new trends that are shaping corporate governance. technology is one of them, and it may force some cor- porations to even modify their reporting processes.

Investors now want financial reports that can be found online and not reams and reams of paper. “today’s compa- nies exist in the information age and company financial statements present- ed according to the relevant reporting standards can be accessed online from the company’s website,” says aCgN’s Mervyn  E. King.

Increasingly, companies that do not leverage on new digital technologies to keep stakeholders continually appraised of pertinent developments are being viewed as less responsive to stakeholder needs. they are also being viewed as secretive, which is never good in terms of public relations or investor relations. this can negatively affect investor con- fidence and lead to bear runs in the case of listed firms, leading to the erosion of shareholder value.

the implications of technology on corporate governance therefore need to be considered, and boards need to respond appropriately. It is also pru- dent to note that technology is a dou- ble-edged sword. as much as it presents an opportunity for closer relationships with stakeholders, it also present signif- icant risk to shareholders.

Fraud is increasingly going digital, affecting a lot of organizations and con- sequently putting investors’ hard-earned money at risk. according to a new report   by  KPMg   International,

technology is a significant enabler for a quarter of the 750 fraudsters investigated by forensic specialists  across  81 countries.

Fraud is a clear and present dan- ger for Kenyan  organizations,  and the increased integration of tech- nology into business processes is making it all the more dangerous. One has to look no further than the insurance industry to appreciate the extent to which fraud has reared its ugly head.

In the past year, insurance fraud rose by a staggering 300 per cent year-on-year in 2015, data from  the Insurance Regulatory authority (IRa) shows. sh366.9 million was involved in insurance fraud in 2015 compared to sh102.76 million the preceding year, the IRa says.

In response, KPMg has plans to set up a regional fraud intelligence platform to help firms in the Kenyan market forecast risks. “to combat it (fraud) we need to work together. Kenya already has a strong percep- tion of the risk so there is a good platform to launch these solutions,” said James Norman, associate direc- tor business development at KMPg Kenya.

this is an important service that companies, under the guidance of their boards and top executives, may need to sign up for.

alternatively, companies can develop in-house alternatives to mit- igate the risk of fraud. the bottom line is that fraud, specifically It enabled fraud, is an increasingly huge threat to shareholders’ funds.

Companies’ leadership therefore need to develop new policies for dealing with such  issues.

Furthermore, they need to incor- porate these polices into their broad- er corporate governance frameworks.

Despite the need for stronger and up-to-date governance structures, it is imperative to note that corporate governance can never be reduced to a  set  of  rules  and  policies,  even  if

these rules are important in dealing with both traditional and emergent corporate governance risks.

Directors and leaders cannot  plan everything down to the last detail. What is preferable is good leadership skills and a correct moral grounding.

“governance is all about leader- ship. Political, economic and social governance   are   intertwined  and while we are only focusing on cor- porate governance in this report, we should not forget the links,” aCgN notes in its report.

aCgN couldn’t have put it any better. Directors and executives need to be good leaders: men and women of proven character, who are consis- tent in the values they portray and stand for, not just in word but more importantly in deed. they need to be held to a high standard, higher than the general public.

admittedly, all human beings have certain proclivities—not all of them noble. Nonetheless, leaders should be held to a high standard, since their scope of influence makes their ailments particularly infectious. this should be the first rather than last consideration when vetting directors and executives, as very often it is the want of ethics and not the want of policy that contributes to poor governance in  organizations.