The success of an organization or business often depends on how well it observes crucial aspects such as accountability, transparency, fairness, and uncompromised responsibility when dealing with stakeholders, and that’s where good corporate governance in Kenya comes in.
Corporate governance outlines the framework that governs the relationship between the top-level management, the board of directors, and the stakeholders, as well as the structure through which the organization sets and attains its objectives.
A good corporate governance framework is governed by the four principles we mentioned earlier (accountability, transparency, fairness, and sense of responsibility), often identified as the four pillars of corporate governance. However, they are not the only governing principles; we have others like participation, strategic planning, ethical behavior, responsiveness, risk management, and independence.
Failure to observe such principles may plunge a well-performing company or established business empire into chaos and lead to its eventual collapse. We’ve seen this happen in the cases of supermarket giants Uchumi and Tuskys and entities like KQ and Mumias Sugar.
This elaborate guide shall help you understand corporate governance, why it matters, and everything about it. Let’s dive in!
Key Takeaway
- Corporate governance is the structured framework in which a company or profit-making organization is run and directed.
- Good corporate governance focuses on four essential pillars: accountability, transparency, fairness, and responsibility.
- Other noteworthy principles of corporate governance include participation, strategic planning, ethical behavior, responsiveness, risk management, and nonpartisan decision-making (by the directors)
- Key benefits of corporate governance include stakeholders’ confidence, clear direction, long-term perspective, enhanced corporate reputation, loss mitigation, business growth, internal controls, and staff retention.
- A corporate governance framework outlines the duties of the board of directors, top management, and shareholders.
- The board of directors oversees the observance of a good corporate governance framework.
- Poor corporate governance leads to accountability issues, ethics violations, transparency issues, operation inefficiencies, conflicts of interest, increased government scrutiny, and challenges in raising capital.
- Classic examples of corporate governance failures worldwide include Enron, Volkswagen AG, HBOS, Carillion, and WorldCom.
- Recent corporate failures relating to bad corporate governance in Kenya include Tuskys Supermarkets, Uchumi Supermarkets, Naivas Supermarkets, Mumias Sugar, Kenya Airways, and Chase Bank Kenya.
- Corporate governance training is highly recommended for all corporate entities to bring the directors and top management to the same page and protect them from incurring liabilities that are unknown to them.
What Is Corporate Governance?
Corporate governance refers to a structured framework of rules, regulations, and basic practices through which an organization is run. It ensures transparency, fairness, accountability, and responsibility in day-to-day dealings with shareholders, customers, staff, suppliers, partners, and other stakeholders.
Corporate governance mitigates potential conflicts of interest by balancing all the interests of the company’s stakeholders. Overall, a company that observes good corporate governance positions itself on a path of success but one that isn’t on the path of an economic fiasco.
What Is the Good Corporate Governance of a Company?
Good corporate governance is about effectively running a company or business by applying strategic policies and best practices that drive you to profitability, improve reputation, and secure long-term success.
Good corporate governance depicts the implementation of measures that promote a positive work culture and desirable corporate behavior. It’s principally based on transparency, fairness, accountability, and responsibility, which we will discuss next.
What Are the Four Pillars of Corporate Governance in Kenya?
Corporate governance is essentially built on four pillars, otherwise known as principles, and any company that observes good corporate governance should depict them. They are as follows:
1. Transparency
In corporate governance, the board of directors is open and honest when providing information about the company’s financial performance, economic risks, and other issues related to the company. They offer correct and timely information about the organization to help earn and maintain the trust of stakeholders.
2. Fairness
Good corporate governance requires the board of directors to treat all stakeholders fairly and equally. They shouldn’t show prejudice, which considerably helps them gain confidence from the community and government.
3. Accountability
The board should explain the reason behind every important decision they take on behalf of stakeholders and the company. They are accountable for assessing the organization’s performance and capacity, legal compliance, and risk management.
4. Responsibility
Corporate governance tasks the board of directors with corporate and management oversight. The board is responsible for acting in the best interest of stakeholders and the company and adhering to laws and ethical standards. Overall, this helps with customer retention as trust is earned.
Other Principles of Corporate Governance in Kenya
In addition to the above four pillars, here are other essential principles of corporate governance:
- Participation – Good corporate governance outlines the duties and responsibilities of the directors, management, and shareholders, and everyone knows what to do to improve the organization’s performance.
- Strategic Planning – Corporate governance enables a company to outline its vision and mission, and everyone understands its value statements.
- Ethical Behavior – A corporate governance framework ensures that the company maintains healthy ethical practices and doesn’t cut corners or engage in malpractices that may plunge the company into economic ruin.
- Responsiveness – The company that observes corporate governance should promptly respond to serious issues and communicate with stakeholders.
- Risk Management – Part of the board of directors’ job is to assess risks and develop better ways to control them. They are expected to inform relevant parties about a particular risk and assure them of their capability to manage it.
- Independence – Corporate governance dictates that the board makes nonpartisan decisions. It should be based on business prudence, not personal preference or conflict of interest.
Benefits of Corporate Governance in Business in Kenya
Every business that plans to establish itself as a market leader needs corporate governance, and here are its key benefits:
a) Stakeholders’ Confidence
Corporate governance requires that the directors are open with the stakeholders, especially regarding profits, losses, and existing risks. In the long run, the board earns the trust of the stakeholders, which is vital to the business’s success.
b) Clear Direction
Corporate governance has clear guidelines and rules and a clear vision and mission. That means that stakeholders know the direction the company is heading, and when that doesn’t happen, they ask questions.
c) Long-Term Perspective
Giant businesses are likely to fail without good corporate governance. Corporate governance ensures financial viability, boosting the chances of the company thriving and continuing to do so.
d) Enhanced Corporate Reputation
Given that corporate governance improves stakeholders’ confidence, it equally enhances the company’s reputation. The community, government, and other relevant parties hold the company in high esteem, making it easy to gain partners or investors and economically thrive.
e) Loss Mitigation
With transparency and accountability comes a sense of responsibility, especially concerning the performance of the business, which helps mitigate the risks of incurring substantial progressive losses.
f) Business Growth
Once there’s loss mitigation, clear direction, trust, and transparency, growth of the business follows. The business starts gaining more prospects as it expands its operations and market size.
g) Internal Controls
Corporate governance ensures directors don’t abuse power and only prioritize stakeholders’ interests. If issues arise, they can address them internally and manage them before they escalate into something serious that could potentially plunge the company into an economic debacle.
h) Staff Retention
Upon gaining the stakeholders’ confidence in good corporate governance, the staff is also likely to have more confidence in the direction the company is taking and the decisions the directors make. Ultimately, that encourages them to stick around, making it easier to retain top talent.
What Is a Corporate Governance Framework?
A corporate governance framework, also known as a corporate governance structure, directs how people interact with the company and its stakeholders to monitor its operations closely. It offers a trunk through which different compliant entities can grow.
Essentially, a corporate governance framework comprises three key players:
- Board of Directors – The board of directors oversees the organization’s management, delegates responsibilities to the CEO, and monitors the organization’s performance. Equally, they are tasked with strategic planning and risk management, among other duties, which we shall address later.
- Management – The management, governed by the CEO, is tasked with setting, managing, and executing the organization’s succession planning.
- Shareholders – Although they aren’t directly involved in the company’s day-to-day operations, shareholders can elect directors, buy stocks, and engage in other investment opportunities. They essentially own the company.
Important Note:
We’ve executive and non-executive board directors. Executive directors are actively and directly involved in an organization’s day-to-day management and decision-making. On the other hand, non-executive directors offer independent and external strategic input and guidance without being directly involved.
Corporate Governance and The Board of Directors
The board of directors is critical to executing a corporate governance framework. Its members are appointed or elected to represent the interests of shareholders. For that reason, directors are tasked to make vital decisions for the company.
Though the structure of the board of directors varies between organizations, most of them constitute the following parties:
- Board Chair (leads the board, presides over the board meetings, sets the main agendas, provides oversight, and facilitates good governance)
- Board Vice Chair (serves as the second in command and assumes the duties of the board chair in their absence)
- Secretary (handles administrative functions during board meetings, such as taking minutes and record keeping)
- Treasurer (oversees the company’s financial health)
Here are the critical roles of the board of directors in corporate governance in Kenya:
- Appointing, compensating, and evaluating company executives
- Defining and implementing the company’s mission, vision, and objective
- Providing strategic direction for the company
- Nominating directors
- Upholding the integrity of the organization during financial reporting
- Protecting members’ investments and interests and company assets
- Making important decisions on committee memberships
- Overseeing and evaluating the company’s annual Budget
- Establishing policy-based governance
- Risk management
- Improving the company’s strategic focus
- Approving dividends and issuance of stocks
What Is the King 4 Of Corporate Governance?
The King 4 is a draft of the 4th edition of the King Reports on Corporate Governance published on 1st March 2016 by IoDSA (Institute of Directors Southern Africa NPC). This code sets out principles, philosophies, and practices that serve as benchmarks for corporate governance.
The King 4 Code supports principles that contribute to the governance outcome. It addresses the board of governors and the organization, making it more inclusive than the previous King 3 Code.
Overall, King 4 Code outlines these essential corporate governance principles:
- The board of directors should lead the organization ethically and correctly
- The board should support and promote an ethical culture within the organization
- Plus, the board should structure the organization as a responsible corporate entity
What Can Poor Corporate Governance Lead to in Kenya?
Poor corporate governance often leads to the total collapse of a successful business. So many established companies have fallen due to poor corporate governance practices. Ideally, you can tell that a company is on a wrong corporate governance trajectory when it starts to experience these issues:
- Accountability issues – Accountability is a crucial pillar of corporate governance. However, once directors and top management can’t account for certain huge expenses and the company starts losing money, it’s usually a case of bad corporate governance.
- Ethics violations – A company that observes good corporate governance is run by a set of ethics and values. Sometimes, however, the lack of accountability, a product of bad governance, leads to violating these moral codes.
- Transparency issues – Companies should report their financials to respective bodies and authorities correctly. It, however, fails due to poor corporate governance and, more often than not, plummets companies into economic ruin.
- Operation inefficiencies – Bad corporate governance leads to complacency from management, lack of accountability from directors, and errors and wastage from employees, which renders the company inefficient in its operations.
- Conflict of interests – Most giant companies in Kenya have been brought to their sweating knees, and some have been forced to shut down because the directors act selfishly. They take out huge funds from the company, leaving it to tussle with creditors and the taxman.
- Enhanced government scrutiny – Once the government notices some noncompliance or bad governance, they puts you in their spotlight – watching your every move.
- Challenges raising capital – Bad corporate governance scares away investors as they lose trust in the board and management, making it hard for a company to raise capital.
5 Popular Corporate Governance Failures in The World
So many reputable companies and businesses worldwide have fallen prey to bad corporate governance practices, which cast doubts on their integrity, accountability, and reliability. Here are five famous corporate governance failures in the world:
1. Enron
In 2001, fraudulent practices bankrupted Houston-based utility and energy-trading company Enron. According to reports, the company’s executives employed deceitful accounting tactics to inflate its revenue and conceal its debt. That was a classic case of lack of integrity and bad corporate governance.
2. Volkswagen AG
In 2015, Volkswagen AG was hit with a scandal that saw its stocks shed almost half its revenue. Reason? The automaker allegedly rigged the engine emission system to manipulate vital pollution tests. Again, this was a classic example of a lack of accountability and bad corporate governance.
3. HBOS
In 2009, UK bank and insurance provider HBOS registered a loss of about £10 billion, which brought it to its knees. Reason? The boardroom failed to spot illegal practices right under its nose.
So, while the board didn’t directly engage in criminal activity, the fact that it happened under its watchful eyes means it was equally to blame, and that’s poor corporate governance.
4. Carillion
In 2018, UK giant construction company Carillion gave way to liquidation. Reports show that the company had been making loss after loss, and the directors tried to hide it from stakeholders until they couldn’t hide it anymore.
Upon realizing what was happening, the investors withdrew their investments. The company even tried to solicit help from the government, who refused to bail them out. Again, poor corporate governance was to blame for Carillion’s failure.
5. WorldCom
American Telecom company WorldCom faced a similar fate to Enron. The company was accused of cooking its books. It later came out and declared bankruptcy, and it even tried to rebrand itself before selling off its network assets to Verizon. If not for bad corporate governance, WorldCom would still be a force to reckon with.
6 Corporate Governance Failures in Kenya
Kenya also has some classic examples of corporate governance failures, and here are the most popular ones:
1. Tuskys Supermarket Chain
Though Tuskys used to be one of the largest supermarket chains in Kenya, with multiple branches across the country and some in Uganda, it’s no longer operational. The supermarket chain failed majorly due to poor corporate governance.
There were issues with accountability, conflicts of interest, and ethics violations resulting from bad governance. These issues only forced the giant supermarket chain to make constant losses, eventually leading to its collapse.
2. Uchumi Supermarket Chain
In 2011, the board of directors for Uchumi Supermarkets, including the late Chris Kirubi, were charged with conspiracy to defraud the giant supermarket chain and breaching public trust. That was a case of bad governance, marking the beginning and end of Uchumi Supermarkets.
3. Nakumatt Supermarket
Having been running for more than 30 years and relishing over 60 outlets in East Africa, no one could have predicted the total collapse of the Nakumatt supermarket chain, but it happened. The bitter truth is that it was a result of poor corporate governance.
According to reports, the directors siphoned over Ksh 1 billion using fake payment systems. The result was empty shelves, closed stores, and a leeway for present giant supermarket chains like Naivas and Carrefour to stamp their mark.
4. Mumias Sugar Company
Before resuming comprehensive operations across the country in 2023, Mumias Sugar Company grappled with escalating debts and diminishing profits. It took the effort of the government to bail out the giant sugar company.
Reason? Poor corporate governance.
5. Chase Bank Kenya
The collapse of Chase Bank Kenya points to bad corporate governance. It was reported that the management used the system to siphon billions due to the lack of oversight of the bank’s IT system.
Shareholders reportedly lose millions due to poor oversight and management. Chase Bank was even declared insolvent by CBK in 2016, and its trading on the NSE was suspended.
6. Kenya Airways
In 2018, regional airline service Kenya Airways fell into insolvency, posing huge debts. “how can such a huge airline get into such a financial mess?” so many ask. The answer was bad corporate governance, and it took the intervention of the government of Kenya, which now owns 48.9% of KQ, to save it.
Why Do You Need Corporate Governance Training?
Bad corporate governance can plunge a company or business into chaos, scandals, and financial ruin. In contrast, good corporate governance drives a business to success. It enables it to remain productive and relevant for a long time.
Corporate governance is a skill that you can learn. It enables directors and management to understand their roles and responsibilities and be on the same page on corporate matters.
The training promotes candid and straight talk on challenging corporate issues without causing discord within the board. Furthermore, it’s an opportunity for board members to bond outside the boardroom and protects the board of directors from unknowingly incurring legal liabilities.
Where the Center of Corporate Governance Comes in
While looking for corporate governance training, you want a practical program that’s tailor-made for your organization, one that addresses your company’s challenges and specific needs, and an interactive and educational option, and that’s where the Center for Corporate Governance (CCG) comes in.
We have been a premier institution promoting corporate governance in Kenya and Africa for over 20 years. We offer a 5-day flagship corporate governance training once a month, offering the option of a face-to-face session or online enrolment.
We also offer a 1-5-day tailor-made course in corporate governance, risk management, strategic thinking, ethics, finances, management, direction setting, and human resource management. So far, more than 15,000 participants have signed up with us, and we have enjoyed a satisfaction score of over 96%. Find out more on our website!
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