Corporate governance refers to the processes and structures through which companies are controlled and directed. With good corporate governance, organizations improve capital accessibility and reduce mismanagement thereby operate more efficiently as mentioned by Waweru (460). Besides, companies become more transparent and accountable to investors as corporate the governance framework give them tools to respond to the stakeholders’ concerns. Additionally, it provides an opportunity for increased access to capital, which improves economic growth, avails employment opportunities for members as well as encourages new investments. It is the role of the corporate governance to specify the responsibilities and rights between members such as shareholders, stakeholders, managers, and board within an organization (Iraya, Mwangi, and Muchoki). Most importantly, corporate governance defines the procedures and rules for decision making. Furthermore, corporate governance can be defined as the structure and process used in managing and directing company’s business activities in the achievement of successful business and realization of long-term interests (Alexander 22; Waweru 462). It encompasses balancing the interests of all stakeholders within the organization. For corporate governance to be defined as playing the above roles, it is traced back to particular history. The paper, therefore, widely explores the origin of the corporate governance structure in Kenya and its application to the unique environment of Kenya as a country.
History of Corporate Governance in Kenya
Kenya’s corporate governance dates back to the 16th and 17th century when the partnership was the ultimate form of doing business. At this time, no separation of management and board roles would occur; participants met together and ran businesses without stipulated structures or policies as detailed by Young and Thyil (14). Nevertheless, over an extensive period, the idea of corporate governance has improved significantly as its discussion began to be centered in all academic meetings, policy makers and regulators in all jurisdictions as well as various boardrooms. Most Kenyan scholars attribute any failure of the corporation to the increased and improved adoption of best corporate governance practices across all sectors.
Though corporate governance in Africa, precisely at Kenya is at its infant stage, Kenya as a country has updated codes and guidelines on corporate governance. This update was after the discovery by the African Corporate Governance Network (ACGN) that the Kenyan organizations are based on various features. Such features include the lack of accountability and transparency, increased corruption at the managerial and board level, archaic and outdated laws, publication of false financial statements as well as an insignificant relationship between the stakeholders and the board (Iraya, Mwangi, and Muchoki). Moreover, there was no understanding of the central concept of corporate governance and risk management, including internal controls of corporations, which got rated as weak.
All in all, in 1998, Kenya’s corporate governance began gaining momentum when a meeting involving non-executive directors was ordered by the corporate governance private sector initiative (CGPSI). The participants of the organization included significant institutions like the Capital Markets Authority (CMA), Association of the Chartered Certified Accountants (ACCA) within Kenyan chapter, the Institute of Certified Public Accountants (ICPAK) and Nairobi Stock Exchange (NSE). Additionally, leading corporate organizations in partnership with the organizers participated in the workshop (Iraya, Mwangi, and Muchoki).
Majorly, the workshop aimed at discussing corporate governance as the main topic. The participants unanimously agreed to a further discussion of the subject to ensure its adoption by all Kenyan companies, therefore, decided on a second seminar held in 1999. Cuomo, Mallin, and Zattoni (223) note that this seminar came up with a decision on the formulation of an interim committee mandated to develop a code of best practice for Kenyan corporate governance as it would directly work towards improving the little knowledge of corporate governance among Kenyans.
The Code of Best Practice for Corporate Governance draft was first adopted, produced and disseminated to more than four hundred development agencies, corporate organizations, government departments and embassies with a request to comment on the draft and the way forward as mentioned by Cuomo, Mallin, and Zattoni (226). When another workshop was held in 1999, it was recommended that the previously distributed and subsequently clean code of best practice for corporate governance be printed, adopted and distributed as a guide for Corporate Governance in Kenya.
Application and Adoption of Corporate Governance Structure to Kenya’s Unique Environment
After being resolved through comments and inputs of the experts from corporate respondents, corporate governance was applied in various sectors within Kenya with the aim of developing it more. Some of the areas include:
Capital Market Authority (CMA)
Although CMA recognized and reinforced the drafting of the Code of Best Practice for Corporate Governance by the Private Sector Initiative for Corporate Governance, it upheld and gazetted the Corporate Governance guidelines repealed in 2002.
Significantly, the guidelines adopted in 2002 embraced the “comply or explain” approach, which guided the companies to include in their yearly statements the state of acquiescence with the 2002 guidelines. Young and Thyil (17) add that the tactic denoted that boards were obligated to conform to the code of corporate governance like they were specified. One could say that committees were necessitated to obey the code and its recommendations mindlessly. Further, the approach demanded from the companies well-explained reasons for the non-compliance with the guidelines and their steps towards compliance. The approach was best and practical since it recognized the uniformity in the implementation of guidelines as it avoided the inflexible approach stated as “one size fits approach” as quoted by Cuomo, Mallin, and Zattoni (231) which required some adjustments.
Conversely, the “comply and explain” approach adopted seemed unproductive because most companies in the real sense did not comply with the 2002 guidelines.
Instead, they only showed interest in “ticking a box” leading to collapse of many Kenyan companies between 2002 and 2015. Considerably, this was based on poor corporate governance especially on banks such as Chase Bank, Imperial Bank, and Uchumi supermarket, still struggling on its last breath to date (Young and Thyil 19).
Consequently, CMA sought to address the above challenges to ensure a smooth running of the companies. Due to this reason, the Code of Corporate Governance Practices for Issuers of Securities to the public was gazetted as 2015 code which succeeded the 2002 guidelines (Cuomo, Mallin, and Zattoni 225). Among the significant changes was the shift of the approach from the “comply and explain” approach to “apply and explain” one adopted in 2015 code. This new plan stipulated various requirements on the company’s board with expectations of full compliance. It meant that the board would follow a recommendation in the best interest of the company. Also, it could decide to apply the proposal differently and yet achieve the objective of overarching corporate governance principles of accountability, transparency, responsibility, and fairness as explained by Waweru (470). It was agreed that the failure of the targeted companies to comply would lead to their disclosure of the no-application reasons to the CMA and show the strategies and time frame needed to be allocated and observed for full compliance.
Development of Mwongozo
The development of the Mwongozo alludes to the code of governance for State Corporations formerly known as parastatals as Cuomo, Mallin, and Zattoni (228) state. These corporations were faced with inadequacies like mismanagement and misallocation of public resources, losses, provision of reduced services and products, inefficiencies, corruption, budgetary burdens among others. Moreover, state corporations operated under a complex governance structure including the ministries, parliament, CEOs and board relationship as per the Presidential Taskforce on Parastatal Reforms report as Bilgin, Gozgor, and Lau (425) note. It is this complexity that caused the above-mentioned inadequacies thus aggravating conflict and confusion in the allocation of accountability and responsibilities.
Furthermore, a report from the task force indicated a lack of a clear outline for selection, recruitment, inductions, and appointment of boards within the Kenyan state corporations since members of the committee lacked proper skills hence misunderstanding their duties as directors (Iraya, Mwangi, and Muchoki). The bloat seen in most board members accounted for the performance of two roles by one person, for instance, the position of the board secretary and the company CEO.
Notably, the above challenging situations led to the development of the Mwongozo where the president directed all the state corporations’ boards to implement the provisions of the Mwongozo. Importantly, the constitution of Kenya Article 10 outlines the Mwongozo and its national principles and values of governance (Bilgin, Gozgor and Lau 427). Similarly, state officers are required in Article 73 to uphold public respect, honor, and trust while Article 232 stipulates the principles and values of public service. Interestingly, the Mwongozo has adopted the “comply and explain “approach.
Principles of Corporate Governance in Kenya
The corporate governance laws were released and revised by the OECD in September 2015. They were directed towards helping policy makers evaluate and improve the legal and institutional frameworks for corporate governance in support of financial stability, viable growth and economic efficiency (Iraya, Mwangi, and Muchoki). The adoption of the principles will significantly help Kenya in the achievement of the vision 2030. The principles discussed are explained regarding categories for more natural clarification of each group as shown below.
Principles of Board Operations and Control
It was postulated that a useful board should head the company so that it may offer strategic guidance, control and direct the company. Also, the board was to ensure the independence of its members through its policies and procedures. An age limit was set for the board members where their knowledge and skills should be updated at regular intervals. Likewise, board members should receive proper remuneration from the companies. It is the role of the board to ensure compliance with the law as well as to provide the implementation of an annual governance audit as cited by Bilgin, Gozgor, and Lau (430).
Principles of Stakeholders Relations
The board was assigned the responsibility of ensuring good relations with the stakeholders as it maintains proper communication (Young and Thyil 21). Again, the board was to provide amicable resolution of both external and internal disputes.
Principles of Ethics and Social Responsibility
Corporate governance board was to set standards and ensure observance of ethical behavior of its members as well as managing the moral issues of the company. Again, the board was obligated to provide the conscious perception of the company. According to Waweru (473), the policies and strategies developed by the company were to guide their activities in becoming good corporate citizens.
Principles of Accountability, Risk Management, and Internal Control
The board was to ensure an efficient and effective risk management framework for the company as well as an internal control system and an effective audit committee. An organization for verifying and safeguarding the integrity of the financial reporting process was to be kept in place as commented by Bilgin, Gozgor, and Lau (434). Concerning disclosure and transparency, the board was to put in place balanced and timely disclosure of the company’s information.
The above principles are about 2015 code and the Mwongozo document that widely attributed to the development of corporate governance. Besides, Cuomo, Mallin, and Zattoni (236) acknowledge that the principles define corporate management both as a process and a structure which impacts the business positively as they help in improving profitability as well as reducing wastage of resources.
Regardless of Kenya being a young nation, it is headed to the right path. Notably, Kenya did not modify any of the countries’ corporate governance structure but took its direction in explaining its structure. Currently, the two primary codes of Corporate Governance are up to date mainly with the OECD corporate governance principles, 2015 code as well as international standards. Personally, my opinion based on my interaction with the Kenyan State Corporations, Listed Companies and Financial Institutions is that there are insufficiency and gaps that require solution and coverage especially on capacity awareness and building. Members of the board, senior managers, shareholders, and CEOs must fully understand and account for the reason behind corporate governance for it to be of high advantage and assistance to Kenya.