Every successful company is directed and managed by a set of guidelines and practices collectively termed corporate governance. Failure to observe these ground rules and actions, which encompass corporate governance, could plunge a company into chaos and collapse, as has happened with many distinguished companies.
For instance, once-mighty companies like Enron, Carillon, and WorldCom fell victim to corporate governance failure on the international stage. In Kenya, retail giants like Tuskys, Nakumatt, and Uchumi are no more due to poor corporate governance, and it’s pretty devastating for investors.
On the other hand, we’ve giant companies that might not be out of business entirely but are struggling to find their footing. It’ll probably take a miracle for them to bounce back and claim the throne they once enjoyed.
In most cases, corporate governance fails because companies fail to observe essential pillars like transparency, accountability, fairness, and risk management when dealing with stakeholders. If that happens, issues like conflict of interest, fraud, and corruption start to stem, and that’s the beginning of the end of the business.
Good corporate governance is essential in building and maintaining trust with stakeholders, as it involves aligning a company’s operations with stakeholders’ interests. Once that’s attainable, it becomes easy for the company to push its core agenda forward, win over the audience, and grow its operations.
This elaborate guide will help you understand what corporate failure is while sharing relevant examples. Let’s get into it!
Key Takeaway:
- Corporate governance encompasses the practices and ground rules by which a company is run.
- Corporate governance failure exists in four forms: board failure, ethical failure, compliance failure, and risk management failure.
- Board failure manifests as poor company strategy, weak oversight, incompetence by the board, lack of diversity, and inefficient internal controls.
- Ethical failure manifests as a conflict of interest, fraud, and corruption.
- Compliance failure manifests when a company deliberately breaks or ignores the law.
- Risk management failure manifests when a company fails to identify, evaluate, and mitigate corporate risks.
- Effects of corporate governance failure include stakeholders’ dissatisfaction, financial distress, operation inefficiency, regulatory risk, and total collapse.
- You can see failure in corporate governance when the board of directors fails to observe transparency, accountability, fairness, risk management, and corporate responsibility.
- Common governance problems associated with corporate governance include poor oversight, accountability issues, transparency issues, conflict of interest, fraud, and corruption.
- Notable corporate failures around the globe include Enron, Carillon, Volkswagen AG, WorldCom, and Blockbuster.
- Notable corporate failures in Kenya include Nakumatt, Uchumi Supermarket, Tuskys, Mumias Sugar, Britannia Foods, Deacons Kenya, and Karuturi Limited.
- Corporate governance failure is avoidable through training and implementing the best governance practices.
What is Corporate Governance?
Corporate governance refers to principles and practices that direct how a company operates and is run. Its core purpose is to balance stakeholders’ interests to avoid clashes that could plunge a company into a scandal or throw it out of business.
Corporate governance is built on several pillars: transparency, accountability, fairness, risk management, and corporate responsibility. If there’s any complacency in any of those areas, corporate governance fails, and the effects can be pretty detrimental to the life and survival of a company.
When Does Corporate Governance Fail?
Corporate governance fails for different reasons, which we can discuss under four categories: board failure, ethical failure, compliance failure, and risk management failure.
1. Board Failure
As the corporate governance custodian, the board of directors may fail to execute its mandate, which could seriously affect the business. Board failure generally manifests in these scenarios:
- When there’s poor company strategy: If a company fails to execute its business strategy, the board of directors is often the first to blame.
- When the oversight is weak: The board has the overall oversight role in any corporate setting. If it’s weak, then the corporate governance structure fails.
- When the board is incompetent or unqualified: Board members should be qualified and well-trained. If that’s not the case, they most likely would make decisions that could impair the company’s operations and productivity.
- When there’s a lack of diversity: The composition of the board of directors should show diversity in gender, religion, and other lines. Anything short of that amounts to board failure.
- When the internal control measures are poor: A company enforces internal controls to protect its interests and prevent ill practices like fraud. That is attained through a competent internal audit team. However, the board may fail to protect the company’s interests if the team is incompetent.
Board failure is preventable by establishing and implementing a solid business strategy, solidifying the oversight, appointing competent members, ensuring diversity, and adopting the correct control measures.
2. Ethical Failure
In ethical failure, a company deviates from its ethical standards, breaches stakeholders’ trust, and jeopardizes its long-term sustainability. It manifests when there’s a conflict of interest, especially among the board members, and when fraud and corruption become rampant.
Overall, ethical failure is preventable through promoting a solid ethical culture, a practical oversight framework, and shielding whistle-blowers.
3. Compliance Failure
Compliance failure occurs when a company deliberately breaks the law or ignores it, and it’s usually the board of directors’ job, together with that of the top executive, to ensure that doesn’t happen.
The problem with this failure is that it often results in legal troubles and damage to a company’s reputation, especially in the eyes of stakeholders. It’s, however, preventable by investing in regular audits, worker training, and compliance programs.
4. Risk Management Failure
Risk management failure occurs when a company fails to identify, evaluate, and effectively mitigate potential risks. The board of directors is often the first to answer to this kind of corporate failure, and it’s avoidable by implementing practical risk assessment and management protocols.
What Are the Key Effects of Corporate Governance Failure?
Corporate governance failure has severe repercussions for a company or business, which include the following:
- Stakeholders become dissatisfied or lose trust in the company, especially its board and leadership
- The company suffers financial distress, which includes difficulty in raising capital and finding investors
- Corporate ethical failure exposes a company to various regulatory risks, such as hefty fines, extensive government oversight, court sanctions, and lawsuits
- The company operations efficiency and productivity drop due to a lack of morale from staff and complacency from management
- Most companies end up collapsing completely after declaring bankruptcy
Where Do You See Failures in Corporate Governance?
A company will likely fail in corporate governance when it fails to observe its core pillars, which include transparency, accountability, fairness, risk management, and corporate responsibility.
In that case, here are the respective failure manifestations:
- Failure to observe transparency when dealing with corporate matters
- Failure to demonstrate accountability for all corporate decisions
- Inability to manage serious risks
- Failure to display fairness when dealing with stakeholders
- Failure to take responsibility for every corporate decision they make
What Are the Common Governance Problems Noticed in Various Corporate Failures?
There will always be problems when a company fails in its corporate governance, and the most notable ones include the following:
- Poor oversight – Where the company leadership unintentionally or ignorantly ignores what’s happening in and around the company
- Transparency issues – Where the company isn’t honest with its financial reporting and the decision-making process isn’t clear
- Accountability issues – Where the board fails to be answerable to the decision it takes on behalf of the company
- Conflict of interest – Where the board members push for their agendas at the expense of stakeholders or the company
- Fraud – Where the company leadership intentionally deceives stakeholders or the general public
- Corruption – Where the company leadership abuses its entrusted power for individual gain
Examples of Companies That Collapsed Due to Corporate Governance Failure
Corporate Failures Around the Globe
Globally, there are classic examples of mighty companies that have fallen due to poor corporate governance. These companies include the following:
1. Enron
There can’t be a more famous corporate governance failure than Enron. This once high-flying American energy company was reportedly engaged in a series of greed-motivated actions that amounted to cheating shareholders and misleading the public.
It was a lack of oversight from the directors, who were also blamed for complacency and incompetence as everything happened under their noses. The company lost billions in share value and was declared bankrupt.
Essentially, the situation could have been salvaged with proper oversight and more competent board members, as the board was responsible for most of the company’s debacle.
2. Carillon
In 2018, Carillion, one of the UK’s leading construction companies, was liquidated after banking on massive income from huge contracts that didn’t materialize. The contracts underperformed in a mighty way, and that saw the company accumulate over £990 million in debt.
Carillion even approached the banks for a £300 million cash injection. However, no one could give them a financial boost – not even the government was ready to lend a helping hand. Consequently, over 43,000 employees lost their jobs as investors counted losses.
The ultimate blame fell on the board of directors, who were accused of failing to assess the risks properly. They had no contingency plan and were blamed for being too overoptimistic or ignorant.
3. Volkswagen AG
In 2015, the Environmental Protection Agency (EPA) blamed Volkswagen of cheating the American audience with its cars. The German car maker was accused of installing a smart device that would tamper with the emission test results on its car engines.
Subsequently, Volkswagen paid a heavy price for this cheating act, including an $18 billion fine to EPA. What’s more, its share prices dropped by about 30% and ended up wiping out more than $26 billion of its share price.
According to observers, the board wasn’t competent enough and, at times, non-functioning, leading to complacency. However, nothing has changed since the company was more than half family-owned.
4. WorldCom
WorldCom is another big name that collapsed due to corporate failure. In particular, it was a case of an ethical failure as the board of directors and top executives were accused of abetting fraud.
According to investigations, top executives inflated the company’s earnings by billions of dollars to hide the company’s actual financial position. Meanwhile, the board of directors failed to provide sufficient oversight, and all their actions sunk WorldCom into bankruptcy.
5. Blockbuster
Before the emergence and dominance of Netflix and other video streaming services, Blockbuster existed. Blockbuster’s worldwide popularity was immense. Everyone who loved movies knew about them and would get movies from them to watch at home.
When Blockbuster sensed the changes in the movie market dynamics, especially the emergence of Netflix, they resorted to delivering movies to people’s homes. Unfortunately, that wasn’t enough to stop what was about to come.
The board and top executives failed in their imagination and business strategy as they were unprepared for the digital age. Netflix introduced its streaming services, which meant that all that consumers needed was a streaming device, and there was no need for home deliveries.
That’s how Blockbuster was kicked out of the movie business, and no one remembers them. With proper strategy and imagination, the board could have prepared better for the digital market, which would have kept Blockbuster in business.
Corporate Failures in Kenya
Kenya has also experienced numerous cases of corporate governance failure. Due to poor governance, many have fallen from retail giants to leading financial institutions. Here are classic examples:
1. Nakumatt Supermarket
Though retail giant Nakumatt had in the past survived multiple liquidation attempts by local banks such as DTB, Stan Chart Kenya, Bank of Africa, and GTB, the supermarket chain finally fell when it couldn’t keep these lenders off its back.
A debt of over Ksh 15 billion saw Nakumatt close its operations in Kenya and East Africa in 2017. According to reports, it was a case of gross mismanagement, tax evasion, and poor strategy, among many others, which amounted to corporate failure.
2. Uchumi Supermarket
A year after Nakumatt exited Kenya’s retail space, Uchumi closed its operations after declaring bankruptcy. After 40 years of local retail dominance, the supermarket chain was marred by frequent legal battles, hurting it financially and inciting investors to pool out what was left of their investment.
Uchumi failed because of weak management, lack of oversight, and poor resource planning. Some directors were even accused of having a conflict of interest. Its failure melts down to three words: ‘poor corporate culture.’
3. Tuskys Supermarket
At one point, Tuskys was understood to be planning to rescue Nakumatt from collapsing, not knowing it was also going the same route. The supermarket chain followed Nakumatt to the graveyard when it couldn’t pay off its debt, amounting to over Ksh 19.7 billion.
In 2020, creditors started going after the retail giant, which drove the high court to order its liquidation and saw its 30 years of regional retail dominance end. None of its 63-plus retail stores are operating today, which is quite a shame.
Tuskys’ collapse was attributed to corporate governance failure, especially the directors’ lack of accountability and transparency and, to some extent, conflict of interest. Simply put, the directors fail to keep the company alive.
4. Mumias Sugar
Though Mumias Sugar managed to bounce back, and we can now find its sugar on the shelves of major supermarkets, the sugar company has had its fair share of tussles due to poor corporate governance.
First, KCB came calling and claimed that the sugar company owed it over Ksh 545 million. Sooner, other lenders, including Bank of Africa and EcoBank, wouldn’t leave the company’s back.
Everyone thought Mumias Sugar was dead and buried in 2017 after it declared bankruptcy and shut its operations, only for the government to its rescue and revive its operations.
5. Britannia Foods
Britannia Foods also faced the wrath of unforgiving lenders when DTB claimed that the biscuit maker owed it over Ksh 1.3 billion. That saw the company shut down in 2021, ending its three decades of local supremacy.
Britannia Foods’ collapse can only be ascribed to corporate failure. The director misappropriated funds and had issues with accountability and transparency, which caused the stakeholders to lose trust in the company.
6. Deacons Kenya
Fashion retail giant Deacons went into administration in 2018 after accumulating losses and debts of over Ksh 600 million. The retailer owed UBA Bank close to Ksh 98.38 million, NCBA Bank (originally NIC Bank) Ksh 94.28 million, and other lenders.
Again, this was a case of a failing corporate governance framework, where the directors failed to be accountable for their financial decisions and be responsible for their mistakes.
7. Karuturi Limited
Flower exporter Karuturi Limited was also placed under receivership in 2014 after failing to pay the Ksh 1.8 billion it owed Stanbic Bank. That was despite exporting over a million flower stems every year.
The receivership instigated a legal battle that culminated at the Supreme Court, which ruled in favor of Stanbic Bank and allowed the bank to auction Karuturi’s assets, including a 7–7-hectare prime land.
Other Corporate Failures in Kenya
We also must mention ARM, which was placed in administration in 2018 after failing to pay the millions it owed Absa, UBA Bank, and Stanbic, as well as Eveready East Africa, which closed its operations in 2021.
Others include Chase Bank Kenya and Imperial Bank Kenya, which were placed under receivership in 2016 following financial mismanagement. They are classic examples of epic corporate governance failures.
What to Do to Avoid Corporate Governance Failure
Corporate governance failure is avoidable, and the secret to doing that is to observe the various governance pillars or practices, which include transparency, accountability, fairness, risk management, and corporate responsibility.
Moreover, most corporate governance issues are overcome by appointing a competent board, observing exemplary ethical standards, staying compliant with the existing regulations, and establishing a solid risk management framework.
We at the Center for Corporate Governance (CCG) can help. We are a leading institution on corporate governance in Kenya and Africa, offering a wide range of corporate governance-related and leadership consultancy services.
CCG is driven by integrity, accountability, transparency, quality service, innovation, and effectiveness. We run a 5-day corporate governance training where we unlock excellence in corporate leadership, particularly emphasizing corporate governance. We can also tailor-made this course to suit your company’s needs starting from one day.
Learn more about this corporate governance mastery course on our website. The intake is underway!
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