Less of ‘too big to fail’ syndrome, more of sound corporate governance


Joshua Kembero Ogega
Is Kenya Airways “too big to fail”? Was Mumias Sugar Company “too big to fail”? These are the questions that have inundated Kenyans since President Uhuru Kenyatta presented a billion-shilling cheque to bail out Mumias Sugar and bring it into operation and since Kenya Airways announced its record Sh25.7 billion loss, and the proposed Sh60 billion bail-out.
This seems to be old news to most Kenyans, especially those who witnessed the fall of major corporations during President Moi’s regime. It must be remembered that most of the corporations that collapsed during this time were the type that can/could be considered as too big to fail. Talk of the famed Kenya Co-operative Creameries (KCC), Kenya Meat Commission (KMC), Rift Valley Textiles Ltd (Rivatex), Kisumu Cotton Mills (Kicomi), just to mention a few.
The failure of most of these corporations has been attributed to utter mismanagement, political collusion and influence, corruption, bad or wrong business models, “acts of God” and so on. Do these really form the main cause of the decline that we are witnessing or are there any other underlying causes? From my observations, very few fingers have pointed at what I perceive as the main cause of the failure of these corporations: poor corporate governance.

The failure of these corporations stems from poor corporate governance regulations largely because of unwillingness to effectively integrate them in the corporate culture in Kenya, and partly because of archaic companies and capital markets’ legislations. It must be noted that the Companies Bill of 2015 has been enacted into law and this paper will look at it to establish if it engenders good corporate governance practices in Kenya.
Concept of too big to fail and its influence on ‘corporate impunity’
The concept of ‘too big to fail’ is borrowed from the preamble of the 2009 Dodd–Frank Wall Street Reform and Consumer Protection Act of the United States of America, which introduced the purpose of the Act as “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”.
The question that remains about Kenyan corporations is whether the “culture of bail outs” is encouraging a culture of corporate impunity, where corporations, especially those partly owned by the government, expect to be bailed out whenever they get into financial doldrums. This is because of the perception that if they fail, there will be many adverse effects on the diverse and disparate stakeholders involved. Is it time Kenya rethought its corporate governance regulations to prevent this corporate impunity?
Explaining corporate governance
How a corporation is managed has been part of corporate legal history and is as old as Adam Smith’s “Wealth of Nations”. Smith noted this about management of corporations and compared their management to that of managing one’s own business. He stated: “The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own.”
What Smith identified is that managers running someone else’s business are likely to act in a negligent manner than when running own businesses. This fear is real, especially where investors want to put their money into a corporation but are not sure if the money will get the returns that they want due to the fear that the business may be ultimately run down.
Randall K. Morck writes in “The Global History of Corporate Governance: An Introduction” that “if investors know what they are doing, capital is allocated to firms that can use it well and is kept away from firms that are likely to waste it.” In this regard therefore, investors will only trust a company enough to buy its securities if they are assured that the company will be run both honestly and cleverly. This assurance comes in the form of what is now known as “corporate governance”.
Corporate governance has been defined as the processes, mechanisms and relations by which corporations are controlled and directed. These relations, mechanisms and processes range from legislated corporate law, securities markets regulations to internal regulations of how a given corporation operates. Anazett Pacy Sifuna defines corporate governance in “Disclose or Abstain: The Prohibition of Insider Trading on Trial” as “a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures, with the intention of monitoring the actions of management and directors, thereby mitigating agency risks which may stem from the misdeeds of corporate officers.”
Corporate governance in Kenya
Corporate governance is not a strange phenomenon in Kenya. There are number of legislations that have been in operation that encompass principles of corporate governance. These include the soon-to-be-repealed Companies Act Cap 486, the Capital Markets Authority Act.
The Companies Act provides a basic grounding on corporate governance by providing for the role of directors and how a company’s board should be set up. The Capital Markets Authority Act gives the Nairobi Securities Exchange the power to make regulations before a company is listed at the bourse. However, listing requirements are scarce on corporate governance principles.
Despite these seemingly negative expectations, The Capital Markets Authority (CMA), through Gazette No. 3362 of 2002, establishes “Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya”, which establish the legal framework of corporate governance in Kenya. However, the recent failures by “too big to fail” corporations affirm the fact that Kenya still needs to do a lot more in terms of encouraging good corporate governance.
Why is good corporate governance necessary?
According to Haslinda Abdullah and Benedict Valentine, in their paper “Fundamental and Ethics Theories of Corporate Governance”, corporations are taxpayers and employers and they influence economies in various capacities and aspects. Additionally, with the emergence of globalisation, businesses operate in a virtually borderless environment which results in less governmental control. There is therefore need for more accountability from these corporations and corporate governance offers as one way of ensuring that such corporations are regulated.
According to Tshepo Mongalo in “The emergence of corporate governance as a fundamental research topic in South Africa”, the reason companies should be subjected to corporate governance is because they contribute immensely to the economic and social wellbeing of society. They are also pervasive in nature, meaning their activities affect almost everyone in countries where they operate. There is also the belief that better managed companies will yield benefits for all, hence the focus on how the corporations are managed by directors, and so on.
This couldn’t be truer if one is to look at how ghostly Webuye town has become following the fall of the Pan Paper Mills.
What, then, needs to be done?
For there to be an effective culture of good corporate governance in Kenya, focus should shift from the shareholder approach of corporate governance to the stakeholder approach.
This will ensure that management looks at the bigger picture – that the corporation does not operate in a vacuum and that the actions of the management affect different stakeholders.
According to Steve Letza, Xiuping Sun and James Kirkbride in their paper “Shareholding Versus Stakeholding: A critical review of corporate governance”, corporate governance is defined as “the understanding and institutional arrangements for relationships among various economic actors and corporate participants who may have direct or indirect interests in a corporation, such as shareholders, directors/managers, employees, creditors, suppliers, customers, local communities, government, and the general public”.
The CMA Guidelines on corporate governance do not take this approach; in fact, they are still stuck in the outdated philosophy that suggests that corporations exist for the benefit of their shareholders. The guidelines echo the thoughts of Milton Friedman in his (in)famous 1970 New York Times article, “The Social Responsibility of Business is to Increase its Profits”.
This can be seen in CMA Guideline 2.3.1 which provides that there should be shareholder participation in major decisions of the Company. This includes providing all information of a company’s assets, restructuring, takeovers, mergers, acquisitions or reorganisation. Therefore, for there to be an effective change in the regulating of corporate governance, there needs to be a shift towards a stakeholder approach. Corporations operate in a multi-stakeholder environment, and it is important that the needs and wishes of these stakeholders are taken in consideration. As such, the following can be recommended.
Rethinking the governing of stakeholder relationships
Stakeholders are important pillars in any corporation. Therefore, there should be a revolutionary change in perspective on how corporations view them. This is to ensure that the needs and aspirations of stakeholders are taken into consideration, through, for instance, ensuring that the decisions of the boards are not autonomous.
The recent squabbles between various employee groups at Kenya Airways that have ended up in court show that there is very little engagement with stakeholders at the corporation. The King Report III, whose recommendations guide listing at the Johannesburg Stock Exchange (JSE), insists on the need to govern stakeholder relationships. Reports on the operations of the “too big to fail” corporations in Kenya affirm that there is little engagement with stakeholders. In “Aviation and Allied Workers Union v Kenya Airways Limited & 3 others”, [2012] eKLR, the Industrial Court determined that there was little or no consultation with the Kenya Airways employees by management.
Integrated reporting and disclosure mechanisms
Corporations, as mentioned above, affect disparate groups in any society where they operate. In contemporary human rights parlance, they play a great role in the achievement of the “right to development”. The right to development has been defined as the right of all peoples to “their economic, social and cultural development with due regard to their freedom and identity and in the equal enjoyment of the common heritage of mankind”.  It is a right which “aims at the constant improvement of the well-being of the entire population and of all individuals on the basis of their active, free and meaningful participation in development and in the fair distribution of benefits resulting therefrom”.
This necessitates John Elkington’s “triple bottom line” approach in reporting. This is an annual reporting mechanism that takes into consideration the “economic, social and environment impacts of a company’s activities”. It moves away from the traditional business accounting approach of the “bottom line” which refers to either the “profit” or “loss”. This kind of reporting ensures that the company reports on its influence in the realisation of the right to development.
This is because the current “bottom line” reporting is focussed on what “profits or losses” were made without looking at the bigger picture on how the society is affected by the losses or profits that the corporation makes. This will ensure sustainability by embracing the “people, planet and profit” and in effect help engender the realisation of the right to development. Additionally, we are not going to achieve much by making board executives report to Parliamentary Select Committees on how these business corporations are managed.
 “Comply or explain” approach
This paper is not geared towards encouraging the enactment of more laws to ensure that there is effective corporate governance. This is because laws and more laws do not necessarily lead to better regulations. This approach has failed in many sectors in Kenya and in other countries. For instance, corporate governance regulations in the United States have failed in a number of times for being too legalistic/formalistic. The script is the same from the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2009. The “apply and comply” as opposed to “comply or explain” approach should be encouraged and adopted.
The “apply and comply” approach, first introduced in the United Kingdom’s Cadbury Report of 1992, ensures that there is both substance and form in regulations since it takes into consideration both legislation and voluntary regulations on corporate governance.  This approach “lets the market decide” on whether a set of standards is appropriate for individual companies, hence creating a “market sanction”, rather than a legal one.
CMA’s regulations provide for this approach but the legislative approach of enacting the guidelines and the fact that the guidelines acknowledge prescriptive measures of compliance affirm the regulations’ leaning towards a “comply or explain” approach. CMA should encourage a culture of compliance, which means doing not only what is legal but also what is right regardless of whether anyone is watching.
The purpose of a corporation is to increase the shareholder value, especially if the corporation is listed at a bourse. The confidence put on listed corporations may be weathered away if failure of the “too big to fail” corporations continues. This calls for a change in the manner in which corporate governance is looked at in Kenya. This will ensure that taxpayers’ money is not used to bail out badly managed corporations and that corporations’ boards are encouraged to adopt better governance styles. Finally, CMA’s Guidelines are, in contemporary standards of corporate governance, outdated. They ought to be reviewed to reflect contemporary practices.^



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