Kenyans are no strangers to corporate malfeasance. Shareholders have lost their hard earned money through shadowy corporate deals orchestrated by directors, management and in some cases staff. Greed and lack of board oversight of management and generally poor guidance. These cases paint a clear picture of the state of corporate governance in Kenya and it is no masterpiece.
Governance is essentially the exercise of power. There is however an understanding that power should only be exercised for the social and economic benefit of the people, that those in power can only use it to serve the public which is the stakeholder in the management of the affairs of the country.
Similarly, in a corporation, corporate governance will refer to the the process and appropriate legal framework that allows a business to be administered with the ultimate objective of realizing shareholders long-term value while taking into account the interest of other stakeholders. In public listed companies especially, bad corporate governance is of paramount importance to protect investors and maintain confidence in the market.
Sir Adrian Cadbury said in the 1992 Cadbury Report, “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals.” Mmore specifically, it is the framework by which the various stakeholder interests are balanced, or, as the International Finance Group states, “the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders”.
While the definition of acknowledges the existence, other stakeholders, most corporate governance guidelines focus on the relationship between disconnected owners (shareholders) and often self-serving managers.
The shareholder are the owners of the company. They have put their money into the company for shares; a unit of ownership, expecting that they will gain from this investment by way of sharing in the profits off the company. This money is entrusted in the director’s hand and they stand in a fiduciary position. One where the shareholders and are valued above all others.
In essence, trustees are only to act in the interest of their beneficiaries; in this case, shareholders. It should be as simple as that but add greed, poor leadership on the part of the board, a public company with thousands of shareholders and few majority shareholders, a lethargic membership that does not put the directors to task etc. and you arrive at a situation where you need some form of mechanism to protect shareholders.
This has been argued to be an agency cost. I.e. A conflict pitting the shareholders on one hand whose interest is in profits and a return on their investment and the management who are self-serving. If left to their devices, it is argued that directors would steer the company in a way that leads to the most benefits for them in their position i.e. business growth, profit retention to ensure high bonuses and job security, little or no oversight from the shareholders and regulatory authorities, using their position to influence company business in a way that enriches both them and their kin etc.
Corporate governance seeks to strike a balance in the relationship between the two parties. This means that the management have to be sufficiently motivated to ensure the success of the company while at the same time safeguarding the shareholders’ investment. It has been suggested that corporate governance consists of two basic elements:
- The long term relationship between management and owners ie. checks and balances, incentives for management and communications between management and investors;
- The transactional relationship which involves dealing with continuous disclosure oblligations.