The private sector must also embrace good governance

Mar 02, 2003 Leadership, Sunday Nation

For years, Kenya’s corporate sector was in denial. Everything was the government’s fault: rotting infrastructure; imprudent monetary policies; corruption and malfeasance in public institutions. And, of course, that old favourite: the lack of a ‘level playing-field’. Meaning that while ‘we’ did things by the book, our competitors dodged taxes, maintained illicit relationships with power brokers, and generally got up to all manner of crookedness. How could hard-working, enterprising Kenyan companies possibly prosper?

Well, it’s all change now. The country’s infrastructure is undergoing a systematic overhaul. Corruption is under sustained attack. Safe hands are at the helm of fiscal policy.

And it’s time some of our corporate titans took a close look at themselves.

It would be very easy to imagine that all the rot in the system began and ended in the public sector. That the private sector, being enlightened about the pre-requisites for the generation of wealth, engaged in more progressive practices. Sadly, this was far from being the case. The collapse of governance was an infectious disease that spared no sector from its withering embrace.

Consider our private companies. Our free-market system allows for a separation of ownership from control. In other words, groups of people (shareholders) are allowed collectively to hold property rights; the usage of the set of resources controlled by those rights (companies) is then delegated to other individuals (managers). To ensure that such a fragmented set-up works, a system of corporate governance is required: a system that forces those who run companies to be accountable to those who own them.

There are two important pre-requisites for the smooth operation of corporate governance: a liquid, well-functioning stock market that allows shareholders to ‘vote with their feet’; and an emphasis on the board of directors as a watchdog body.

Are these pre-requisites present in Kenya? Hardly. We certainly don’t have a liquid stock market: the bulk of shares in public companies are typically concentrated in very few hands. It is believed that fewer than 3 to 4 per cent of outstanding shares are traded on the Nairobi Stock Exchange in any given year. And when was the last time you heard of a hostile takeover bid in Kenya? So many of our companies are valued by the stock market at levels far below even the book value of their assets; even so, takeover activity is unheard of. The threat of takeover is clearly irrelevant as a governance tool here.

More crucially, the role of the board of directors has been distorted beyond recognition. Directors should play a critical role in good governance: they provide the link between managers and other stakeholders in the company. As such, they have a fiduciary duty to act in good faith and in the interests of shareholders as a whole. They also have duties to not misuse their powers, to avoid conflicts of interest, to exercise skill and care in the stewardship of the company’s assets, and to fulfil the requirements placed by law upon the company. In addition, they are required to be skilled and knowledgeable individuals, able to bring their experience to bear upon a wide range of issues.

In Kenya, it seems that people often become directors to do precisely the opposite: to act in bad faith; to enrich themselves at the expense of other shareholders; to seek conflicts of interest; and to misuse their powers wherever and whenever possible. Our newspapers are full of accounts of corporate mis-governance: directors of banks awarding themselves unsecured loans that are rarely serviced; bosses using company cars and equipment to conduct private business or political campaigns; managers awarding contracts to companies in which they have a personal interest; blatant buying and selling of shares on the basis of privileged information. In short, many directors have reduced their once-exalted role to a level not much higher than that of the common thief.

And what of competence? Do our directors and managers have the expertise to do what is expected of them? A system that emphasised the importance of patronage and cronyism was not conducive to the promotion of excellence. In short, we got the leaders that our values deserved.

Too many companies took the short cuts to success: creating a web of relationships with powerful scoundrels; corrupting individuals in the revenue authorities; developing the gathering of insider information. And they certainly reaped the benefits: they obtained preferential loans, won tenders, never paid duties. In doing this, they deluded themselves that they were actually good at business, that their more straight-laced competitors were the dummies.

Well, as they reaped, so they shall now sow. As their illicit sources of competitive advantage dry up, these companies will be exposed for what they are: hollow to the core. They made no attempt to cultivate excellence in their people, nor invest in their systems. They cared not a whit about efficiency in their processes; they simply didn’t need to. While they flourished, our international competitiveness plunged. The average quality of our products and services tells the grim story.

As Kenya cleans up its act, it’s time to consign these hucksters to the dustbin of history. The new government must place great emphasis on installing capable regulatory bodies and on developing efficient markets. Never again must patronage be allowed to become a source of advantage.

In addition, our best companies must take their own measures to build good corporate governance. Many will need to reinvent their boards of directors, and bring in individuals with a passion for professional integrity. It is the breadth and depth of business experience that will count now, not the sleazy promise of contacts in the right places. Bold restructuring will become a necessity.

As they undertake this, our corporations need not look too far for role models. They may not be many, but shining examples do exist in Kenya. They are the companies that emphasised good governance when it was a prudish irrelevance. They are the businesses that invested in people and technology as others invested in contacts. They are the firms that honed their competitive advantage from intelligent alignment of strategic positioning and operational processes. And they did it year in, year out, in good years and bad.

Which are these companies, you ask? Kenyans know the answer. They include those listed firms (with one or two notable exceptions) whose share prices have jumped dramatically as the winds of change sweep through the country. As small Kenyan investors pull money out from under their mattresses, they know exactly where to put it: in the companies whose fundamentals are right. As a famous football manager once put it: “form is temporary, class is permanent.”