Poor corporate governance remains our Achilles heel

By Billow Kerrow

Many Government institutions, including state corporations and ministries, have major weaknesses in corporate governance, which has led to corporate failures, poor performance, wealth destruction, fraud and corruption.

The National Cereals and Produce Board, the New KCC, City Council of Nairobi, Kenya Medical Supplies Agency, Kenya Pipeline Corporation, Kenya Airports Authority, Kenya Ports Authority and Ministry of Education, among other Government departments have recently appeared in the media for all the wrong reasons. Invariably, Kenyans have called for greater accountability, and in the ensuing frenzy, political leaders have borne the brunt of public hysteria for action.

A critical look at these institutions will reveal that it is lack of good corporate governance that is to blame. The policies, procedures and systems affecting the way our public institutions are directed, controlled or managed leave a lot to be desired. Rather than enhance wealth creation and the integrity of our institutions, which is central to the health of our economy, the perennial adverse reports expose abundant disregard for ethical behaviour and best management practices.

Weak structures

Though not on the same scale, weak corporate governance also permeates our private sector entities. It is believed that about a fifth of the listed companies do not have a good board mix, or board committees for that matter. Lack of transparency and inadequate disclosure of company results, ownership and corporate social responsibility is still a major concern, leading to increased shareholder activism at annual general meetings. Nonetheless, there is a remarkable improvement, especially in the financial sector, compared to the 1990s when 36 commercial banks collapsed due to bad corporate governance practices.

In 2002, the significance of good corporate governance hit world headlines when major corporate failures occurred in the US, such as Enron, WorldCom and Tyco leading to seven of the 12 largest bankruptcies in US history. Many nations took immediate steps to reinforce regulatory environment particularly in the areas of risk management, internal controls, disclosures and personal accountability of CEOs. Corporate governance principles, hitherto only guidelines, were quickly enacted into law, such as the famous ‘Sox Act’ in the US.

In any serious nation, the quality of its corporate governance strongly influences the character of its capital markets, especially the availability of external capital. Clearly, sound corporate governance is essential for the trust of its investors, and protection of its stakeholders, including the shareholders, creditors, employees, government and even customers. In the corporate world, it affects a company’s ability to raise capital — the share value of a company will fall if the market perceives that it has poor corporate governance practices.

Our public entities have not adopted appropriate corporate governance guidelines, and those that have do not enforce them. The confused application of the State Corporations Act, Company’s Act and various circulars and directives from Office of the President or parent ministries on an entity often creates conflicting structures and procedures.

Statutory procedures

The Executive routinely overrides existing statutory procedures in appointing CEOs and board members due to political expediency. A CEO appointed directly by the President or minister will slight his board, which lacks de facto authority to hire or fire him. Civil servants attending board meetings as alternate directors would challenge such a CEO at their peril.

There is no dynamism in such boards, and it often lacks in skills mix necessary to discern company policies, operations and performance. The inherent culture of political patronage drives human resources recruitment and promotion policy in public entities. Internal controls to enhance checks and balances are often ignored, creating an enabling environment for unethical rent-seeking behaviour.

Appropriate risk management measures are somewhat articulated in most institutions but are seldom enforced, especially in procurement. Top management can override the entity’s authorisation and approvals procedures at will, citing orders from above, even when there is none. Internal audit organs never challenge the established order, and when they do they barely scratch the surface. Since public accounts are often audited years later, external audits do not provide enough deterrence to mismanagement of public resources.

There is an urgent need to reinvent our public service through innovative reforms to address challenges of inefficiency, lack of accountability and transparency and the pervasive rule of authority. A paradigm shift on Civil Service thinking, organisational culture, work ethics, policy quality management and evaluation is long overdue. Above all, Executive commitment to embrace good corporate governance in the public service is imperative.

It is in the interest of the political class that this is done to avoid the persistent calls for their resignation whenever a public entity faces a crisis; except, of course, if it is rightly demanded where political responsibility demands. The more executive role ministers play in their dockets, the higher the risks of placing their necks on the chopping block.

—The writer is a political economist and former MP