Apr 17, 2016
When the Capital Markets Authority, CMA published a Code of Corporate Governance Practices last month, we did a focus note on Corporate Governance in Kenya . In that focus note, we highlighted instances where potential corporate governance malpractices may have contributed to significant loses to the investing public to the tune of approximately Kshs. 257.0 bn. We then made suggestions on how to improve corporate governance. In this note, we update the count of recent losses due to corporate governance, we then review how we can improve corporate governance in this market and highlight our upcoming Corporate Governance Index.
Since the March 2016 article, we have had two more instances of significant investor loses that are primarily about corporate governance and ethics - the collapse of Chase Bank and the management changes at National Bank of Kenya (NBK). Not even considering any potential depositor losses, Chase Bank bond holders currently have Kshs. 4.8 bn at risk and NBK shareholders have lost Kshs. 2.0 bn in total value since the recent peak of Kshs 16.0 per share in November 2015 to the current Kshs 9.20 per share.
Total number of companies that have incurred investor loses relating to corporate governance now comes to 8: previously we had CMC, Imperial, Uchumi, Mumias, Kenya Airways and TransCentury, and now Chase Bank and NBK. The estimated potential losses to the investing public now amounts to roughly Kshs. 263.0 bn. This trend threatens the health of our financial and capital markets, which are essential to the wealth and livelihoods of many Kenyans invested in these markets, and also threatens businesses that depend on these markets for funding. As seen in the most recent occurrence, isolated cases such as Chase caused a crisis of confidence in the entire banking industry, stopped access to Kshs 94.3 bn of deposits and has cut funding and services to enterprises that relied on Chase for running their business.
In an economy with a GDP growth rate of about 6.0% per annum, investors should not be experiencing such significant widespread losses, and the prevalence of corporate governance issues that is affecting almost 10% of listed securities should worry us. All market participants including investors, regulators and corporates need to do their part in addressing the crisis of corporate governance in our private sector.
Corporate governance constitutes the mechanisms, processes, and relations through which companies are controlled and governed. Corporate governance is founded on the pillars that businesses have to practice accountability to stakeholders, fairness, have transparency in business activities and exhibit independence in decision making of the board. The benefits of good corporate governance are numerous as (i) it protects the interest of the investing public, (ii) improves access to funding at better costs, (iii) reduces risks of corporate crisis, (iv) improves firm valuation and share price performance, and (v) generally improves the performance of the entire firm and enhances sustainability.
There are numerous aspects to good corporate governance, including equitable treatment of shareholders, balancing the interest of all stakeholders, a competent and diverse board, ethical standards, disclosure and transparency, conflict of interest policy, firm but fair regulatory environment, etc. While all these aspects are important, we find the following five to be key to quickly enhancing good corporate governance in Kenya:
Following the recent developments that are largely driven by failures in corporate governance, we have constructed an index to rank companies according to the effectiveness of their corporate governance framework. We rank companies using 25 metrics that monitor a companys operations in the aspects of (i) strategy execution, (ii) risk management, (iii) director and management discipline monitored through evaluations, (iv) transparency, (v) independence of board members, (vi) responsibility and accountability of management and directors, (vii) fairness towards shareholders and other stakeholders, and (viii) participation in social responsibility activities. The components of the index and the respective scores are currently undergoing review and discussions with the participants prior to release.
Good corporate governance is essential to well-functioning and vibrant financial markets, and vibrant financial markets are essential to funding economic growth, which in turn creates jobs and raises the standards of living for Kenyans. Consequently, good corporate governance is a national imperative and we have a choice: we either focus on it and get it right for the benefit of all Kenyans, or give it lip service for the benefit of a few unscrupulous players.
Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.