Last week, wrangles at the motor dealer spilled to Parliament where Ikolomani MP Bonny Khalwale, sought to know what the Government was doing to protect the interest of 14,000 ordinary shareholders.
Probably to the excitment of minority shareholders, Capital Markets Authority (CMA) suspended trading of CMC shares until January 27 as it investigates claims of fraud involving a major shareholder ousted as chairman on September 8.
Mr Sunny Bindra, a management consultant and trainer, says that with a major company now suspended from trading on the Nairobi Securities Exchange (NSE), it is time for business leaders to take corporate governance seriously.
“Sitting on a board is a role of great fiduciary responsibility towards all shareholders, not just those who appoint or back you,” Bindra says.
He says the truth of what ails the CMC Motors board must be left to the investigating authority, but it should serve as a wake-up call to many other boards to sort out governance structures and processes.
Industry insider reports show that, most companies, including those that are listed at the stock market, operate without proper direction and oversight of the risks they face in the business environment, pushing poor governance to the top of the list of corporate Kenya’s challenges.
The first responsibility of the board is to attain and maintain profitability for shareholders. But as it emerges, instead of directors being the brain of the company and the main link to the third parties, they have failed in two critical roles — of skill and care.
Mr Lewis Kamau, Nairobi-based corporate governance consultant says failure of internal policies and procedures in safeguarding the business from risk, fraud and other unethical business conduct by management is to blame.
He says abuse of power and authority by a major shareholder can also cause corporate failure. Collapses due to governance failure has been experienced in Kenya for several years stretching back to the 1980s.
Many of these failures have been in listed companies and the financial services sector (banks, stockbrokers and insurance companies), that have a significant public interest component leading to a great deal of pain and suffering by shareholders, depositors, policyholders, creditors and employees.
Kamau says to a significant extent many of these failures can be attributed to neglect on the part of boards in exercising diligence in oversight over management.
Kenya has also been found to have a unique boardroom character that operates in an axis of two extremes.
On the one end of the spectrum are monolithic boards that do not encourage contrarian views but thrive in group-think, while on the opposing end are completely discordant boards, where fights and public fallouts are the order of the day.
The monolithic character of the ‘group-think’ boards makes it nearly impossible to unveil the costly decisions they make.
Also political shenanigans can be linked to the collapse of a number of boards, especially in State corporations.
Experts say there is need to create sufficient constitutional, legal and institutional framework that encourage and foster accountability and good governance in organisations.
In many parastatals boards, the problem, experts say, is the muddled legal regime under which the corporations operate. On one hand, they operate as limited companies complete with boards of directors. On the other, they guided by the State Corporations Act.
Analysts, however, believe that the performance of every board is largely dependent on its chair and how he or she manages its deliberations through creation of chemistry among directors and balancing debate between the different wings of the board.
“Boards must go beyond cosmetic compliance with good practice and embrace a boardroom culture that guarantees authentic compliance with good governance practice,” Kamau says.
Mr Joshua Wambua, a former chief executive officer of the Institute of Certified Public Secretaries of Kenya, told Financial Journal conflict of interest is the main issue inflicting many boards. “As much as possible people in higher positions should avoid situations that lead to conflicts,” Wambua said, “It is important to declare your interest as a board member.”
Individuals doing business with the company, when appointed to the board should declare their business interest. Board members must evaluate whether conflict might undermine smooth running of the organisation.
“The member is supposed to resign if there are conflicts of interest with the company. The director who is in conflict should not participate in meetings,” Wambua says, “Or still he can attend meetings but not participate in decisions or vote.”
A lecturer at the University of Nairobi School of Business, Mr XN Iraki, says Kenya urgently needs an investor’s protection board, something like (Depositors’ Protection Board) so that those who have put their money in stocks can feel safe.
“Currently most investors do not feel safe. Do you notice how recent IPOs are under subscribed, unlike Safaricom, which was oversubscribed,” he says.
“Investors also feel unsafe in terms of falling prices. We need more confidence to invest in the Nairobi Securitis Exchange.
He says Capital Markets Authority needs to be proactive since problems in boardrooms did not happen overnight.
Balance of powers in the board
The board should ensure that no one person or a block of persons has unfettered power
Companies that have been successful and been able to grow their tentacles, their boards have a good balance of well-chosen, competent directors who will shape a strategy for the future of the organisation and direct its interests to ensure profitable performance and sustainable growth over the longer term
A proper process of selecting a director is crucial to avoid the propensity for cronyism and tokenism
It is recommended that outside directors maintain their independence and do not benefit from their board membership other than remuneration