CORPORATE GOVERNANCE IN KENYA
This was Chapter 3 of my dissertation. A wonderful read for lovers of corporate governance especially as relates to the Nairobi Securities Exchange
3.1 INTRODUCTION
Traditionally the idea of
starting a business was driven by one motive only; that is to make profits.
Questions of good corporate governance and business ethics never arose. All
that mattered to organizations was whether they made profits and not how the
profits were made [1].
Indeed most private business leaders are driven by profits and make no
apologies for it. Ellen J Kullman, president of E.
I. Du pont de Nemours and Company states that:
“Without profits, our system
literally cannot be maintained anymore than man can survive without oxygen. No
one would argue that breathing is an objective of life but no one could deny
that, without it, no other objectives would be conceivable. And so it is and
takes with it any possibilities of improving man's state of affairs. ”[2]
This statement only serves to
emphasize that profit making has been and continues to be at the epicenter of
many corporations and other business enterprises the world over.
However, new challenges of
corporate governance and business ethics that have been grappling corporate
bodies are an indicator that business may after all not be all about profit
making, proper management and customer care are to be taken into account if
corporate bodies are to achieve their end goal of profit making.
In this chapter I shall discuss
the legal basis of corporate governance in Kenya. I shall also undertake an
analysis of failed public listed corporations and brokering agents in Kenya in comparison to those in America.
In addition I shall discuss both the legal and ethical requirements of
corporate governance.
3.2 What is Corporate Governance?
Professor Nicholas Biekpe[3] defines
corporate governance as a system by which corporations are directed, controlled
and held to account. For him, corporate governance embraces issues of public
policy which he defines as a system by which the legitimacy, relevance and
compliance of a corporation is monitored, supervised and regulated and self
regulatory mechanisms by which the corporation governs and conducts itself to
ensure that it remains legitimate, viable and competitive.
This definition is further
supported by Walsh and Lowry[4] who
define corporate governance as the checks and balances adopted by a company to
protect interests of its shareholders and shareholder value. It ensures that
through a variety of oversight mechanisms, the management is encouraged to
develop the business in the best interests of the shareholders and is not
allowed to waste or otherwise divert corporate assets.
The guidelines on corporate governance[5] on the other hand define
corporate governance as the process and structure used to direct and manage
business affairs of the company towards enhancing prosperity and corporate
accounting with the ultimate objective of realizing shareholders long-term
value while taking into account the interest of other stakeholders.
Thus from the above definitions a
prudent conclusion would be that corporate governance may be defined as a
system by which a corporation is directed, controlled and held to account the
manner in which power is exercised in the stewardship of its assets and resources
and to increase and sustain shareholder value and satisfy the needs and
interests of all stake holders.
3.3 CORPORATE GOVERNANCE IN KENYA
In 2002, the Capital Markets
Authority introduced corporate governance guidelines[6]
for all public listed companies at the Nairobi Stock Exchange. These guidelines
derive their legal basis from the Capital Markets Authority Act[7]
under Section 12 which mandates the Capital Markets Authority to
formulate rules guidelines and regulations as may be required for the purpose
of carrying out its objective to regulate activities in the stock market. These
principles were further strengthened by Kenya's adoption of Organization of
Economic Co-operation and Development's principles of corporate governance[8].
In Kenya, the corporate governance
principles at the capital markets are enforced through the “comply or
explain” principle[9]. In
essence this principle is to the effect that listed companies are required to
comply with the rules, regulations and laws laid down by parliament or the
capital markets authority, it being the regulatory body. Failure to comply the
company, through its directors must explain the reasons for none compliance or
risk facing serious sanctions.
For instance the capital markets
authority requires that all listed companies and brokering firms and banking
institutions so authorized to act as agents do file annual returns on their
financial base.[10]
Where a company fails to do so, the company through its directors is
required by law to give sound reasons as to the failure to file the returns and
in the event it fails to do so then the company or the agent may be suspended
from activities at the stock market until it complies with this requirement.[11]
3.4 CORPORATE FAILURE IN PUBLIC LISTED COMPANIES AND BROKERING AGENTS
As discussed in chapter one,
number of corporate bodies collapsing or being placed under statutory
management has been on the increase not only in Kenya but all over the world[12]. In USA for example there was the
collapse of Enron Corporation, World Com and Adelphia all of which were very
huge corporate bodies. In Kenya
the Collapse of financial institutions such as Euro Bank, Daima Bank and
brokerage firms such as Nyagah Stock Brokers, Discount Securities limited and
Francis Thuo and Partners has had adverse effects on the Capital markets the
effects of which are borne by the investor.[13]
There have also been cases of
brokering firms misappropriating their clients’ funds. Concerns have been
raised that some brokering firms were trading their clients’ shares without
instructions and where they traded with instructions from the clients; they
failed to effect the instructions promptly or pay the proceeds within the
Capital Markets Authority stipulated three days.
The following is an analysis of
the collapse of some of the companies mentioned above.
3.4.1 The collapse of Enron
The Collapse of Enron, a
multinational company in the USA
in November 2001 perhaps marked the height of corporate governance failure.
According to Robert Hamilton[14]the
company was a merger of two interstate pipelines that had converted itself in
less than a year from a stodgy pipeline operator to a virtual company trading
in a wide range of tangible and intangible goods such as natural gas and
electricity. Kenneth Lay its CEO had been ranked as one of the top 25 managers
in the United States
and the company had been described as a titan in the natural gas industry.
It is the disclosures of a former
Enron employee and whistle blower, Sherron Watkins that brought to light the
various malpractices that were taking place in the company. After the
disclosure Enron announced that it had overstated its earnings by $567 million
in the previous year alone. Shortly after, the company filed bankruptcy
protection. The value of its shares dropped from $80 to pennies per share. As
it turned out, through a widespread use of special purpose entities Enron hid
very substantial liabilities and avoided disclosures of the inherent weaknesses
in its business operations.
The collapse of the company set
off a storm of litigation. For instance there was litigation that involved a
complex transaction involving Nigerian electricity producing barges purchased
by Merill Lynch from Enron. A finance chief at Enron gave an illicit promise in
December 1999 to Merill officials concerning the contemplated purchase of the
barges and promised to take the company out of the deal if it was unable to
find a purchaser within six months. Merill accepted responsibility for the role
its employees allegedly played in the transaction and in 2004 four of its
executives were convicted for knowingly entering into a sham transaction in
respect of the barges in order to preserve Enron's tax position.
On the other hand, over thirty
former Enron executives were criminally prosecuted. The former CEO Ken Lay and
the Former CEO and COO Jeffery Skilling were convicted for conspiracy and fraud
in connection with the company's collapse. Ken Lay died a few weeks after his
conviction while Mr. Skilling is serving 24years jail imprisonment.
3.4.2 The Neuer Market Bubble
There is also the huge
speculation which occurs in shares associated with the Internet which has led
to the creation of a stock market bubble. A stock market bubble is an upward
price movement over an extended range that implodes and is characterized by
speculation and irrational exuberance. When there is a large technological shift like the
Internet, inevitably there is a great
uncertainty about the future and if technologists, venture capitalists ad
entrepreneurs produce a convincing theory about the Internet, business leaders
feel they have to be on it otherwise they might miss out on the next big
opportunity. As a result capital investment projects suddenly become more risky
even in established businesses which may suffer if the theory comes true. The
business leaders will not know if their investments were too risky until the
bubble swells and bursts.[15]
An example of a stock market
bubble would be the Neuer Market in Germany which was founded in March
1997 with Fortune City.Com as the first dot.Com company listed in March 1999.
Many more technology companies followed and the index rose to a peak of around
8500 in early 2002. In 2001 there was a series of company failures and
investigations into insider trading. The market index dropped to around 1000.
The Neuer Market was closed in 2003.
In September 2002, a German
Investment Analyst told the financial times that “the market has been burnt
badly...retail investment in Germany
has been wiped out for a generation”. The German Authorities reacted by
introducing a new corporate governance code and a new law on transparency and
publicity.[16]
3.4.3 Collapse of Nyaga Stock
Brokers
Closer home is the Nyaga Stock
Brokers brokering firm whereby many persons lost their money. There were claims
that the firm would illegally make transactions on behalf of their clients’
despite the fact that it had no instructions from that client at all. There
were also claims that unknown persons would hack into the firms system and buy
and sell shares without raising any suspicion on the firm.
In addition it was established that the
information submitted to the Capital Markets Authority was manipulated in order
to ensure that the company met the requirements of the Capital Markets
Authority and further to hide the fact that the firm’s financial base could not
support its operations[17]. All
these factors and many more led to the close of the firm.
3.4.4 The Near Collapse of Uchumi Supermarket
There was also the case of Uchumi
Supermarket Limited. Uchumi Supermarket was a government initiative established
in 1976 to promote local products and low pricing of goods. Uchumi supermarket
was therefore the trendsetter in low pricing of high standard goods. It was
also the initiator of hyper markets[18] in Kenya
establishing the hyper markets in residential areas and thus enabling it to
remain closer to the consumers’ pocket.
In 1992 the company went public
through an Initial Public Offer at the Nairobi Stock Exchange where 60 million
shares were floated. The Uchumi supermarket then went ahead and opened branches
outside Nairobi
the first one being opened in Nakuru. However, in 2006, there were signs of
trouble when Uchumi closed down ten of its branches. The supermarket then went
on to raise a rights issue of kshs 1.2 billion which saw a majority of the
shareholders shed off their shareholding from 52% to less than 20%. Thereafter
the company was declared insolvent by its Board of Directors and was placed
under receivership by its lenders. The supermarket then reopened after the
government lent it kshs 675 million.[19]
In all the above cases, the
primary loser was the investor thus raising an alarm as to the extent to which
the investor is cushioned from losses associated with poor corporate
management. The capital market has become a core unit in the world economy and
as a result there is need to protect the investor albeit in a bid to ensure
sustenance of the capital market.
[2] Catherine Riungu, Imelda Bore, Failure of
Corporate Governance, 2009
[3] Prof
Nicholas Biekpe, African Capital Markets: Legal and Governance Frame work, what
is Corporate governance
[4] Corporate
Social Responsibility: The corporate
governance of the 21st century, M Walsh and J Lowry, CRS and Corporate
Governance
[5] Guidelines on Corporate Governance Practices
by Public Listed Companies in Kenya,
Gazette Notice No. 3362 of 2002, 14th May 2002,
Article 1.2
[6]
Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya,
Gazette Notice No. 3362 of 2002, 14th May 2002
[7] Chapter 485 Laws of Kenya
[8] Principles of Corporate Governance, accessed
from eStandardsForum, www.estandardsforum.org/kenya/.../principles-of
corporategovernance, on 5th April 2011
[9]
Principles of Corporate Governance, accessed from eStandardsForum, www.estandardsforum.org/kenya/.../principles-of
corporategovernance,
on 5th April 2011
[10] Section 13 Capital Markets Authority Act, Cap
485 Laws of Kenya
[11] Section 22 Capital Markets Authority Act, Cap 485 Laws of Kenya
[12] Manduku S, Tough
Laws can Tackle Corporate Scandals Business Daily, November 2008
[13]
C. Riungu and I. Bore, Failure of Corporate
Governance, 2009
[14] Robert Hamilton, Corporate Governance in
America 1950-2000: Major Changes but Uncertain Benefits, Corporations Including
Partnerships and Limited Liability Companies, Tenth Edition pg 573-4
[15] B. Taylor, Corporate Governance: The Crisis,
Investors Losses and the Decline in Public Trust, 10th September
2003
[16]
B. Taylor, Corporate Governance: The
Crisis, Investors Losses and the Decline in Public Trust, 10th
September 2003
[17] Catherine Riungu, Imelda Bore, Failure of
Corporate Governance, 2009 at page 5
[18] A huge supermarket usually built in the
outskirts of a town
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