In Kenya, bad ethics is good business until you get caught

BY STEVEN ORENGO

‘Good ethics is good business’, is perhaps one of many platitudinous phrases used in the corporate world. The ruthless pursuit of wealth, power and outright corporate greed in recent corporate scandals in Kenya has demonstrated that this ethical catch phrase has no sway in many boardrooms in Kenya.

From boardroom wrangles at CMC Kenya, shareholder wrangles in the Tatu City Mega real estate project and the recent action by the Central Bank of Kenya (CBK) that placed Dubai, Imperial and Chase banks under receivership due to fraudulent activities by management and/or directors are but a few cases from a plethora of corporate sleaze in Kenya.

It is quite clear that our framework for good corporate governance practice is inadequate for a myriad of reasons. Political interference in board appointments and activities of regulatory bodies would make one skeptical about the will and technical ability of political appointees. The roles of various regulatory bodies are clearly delineated but there are some areas of overlap and lack of frameworks for coordination where overlaps exist. Both Imperial and Chase bank were cleared by the Capital Markets Authority (CMA) to issue corporate bonds and yet both banks had liquidity and regulatory issues with the Central Bank of Kenya (CBK). Is there a framework for the CBK to share information about operational risks with the CMA and other interested regulators?

Kenya has done fairly well in enacting laws but little has been done in terms of enforcement. There is lack of political will to enforce laws that ensure accountability and compliance. Furthermore, the Judiciary and other actors such as the Office of the Director of Public Prosecutions, Directorate of Criminal Investigations and the Ethics and Anti-Corruption Commission have credibility challenges to surmount as no public or corporate theft scandal in recent past has been prosecuted with successful convictions and asset recovery.

In the United States, the infamous Enron scandal ended with jailing of the CEO Jeff Skilling for fraud and insider trading as well as the demise of Arthur Andersen after its reputational damage for aiding manipulation of accounts. The same should happen in Kenya to serve as an example and deterrent to corporate fraud. In a country where corruption is legendary and so pervasive that it has become an accepted way of life, the lack of political will to “bite the bullet” has been a major impediment to the “war on corruption” and has emboldened corporate thugs to engage in fraud. It is no surprise that the hoi polloi have supported CBK’s recent actions to mop up the banking sector, as finally someone is seen to be taking the bull by its horns.

How many shareholders scrutinize annual reports with the intention of raising critical questions at annual general meetings? How many know the difference between the roles of the Chairman and the CEO? Do they know the difference between audited and unaudited accounts? How many investors are aware of or have read the recently gazetted CMA Corporate Governance Guidelines (2015)?

Corporate governance and the different roles played by boards, management, auditors and shareholders is an area misunderstood by many. Many listed firms have the problem of small retail shareholders that do not engage or challenge boards and expectations of most shareholders are for higher dividend payouts and branded freebies. Shareholders do not raise questions about directors’ emoluments, firm expenditure, cash reserves, diversity in appointments and many other corporate governance issues. In light of recent corporate scandals in the banking sector, the CBK Governor encouraged shareholders to raise questions about insider loans to directors and staff as well as calling for greater scrutiny of audited accounts.

This lack of citizen participation is not confined to corporate governance. Visit any public participation forum organized by county or national government institutions and there is very underwhelming attendance and engagement by citizens. While conducting research for my Master’s thesis, I identified some factors that explain the lack of critical engagement of boards by small individual shareholders.

Several cultural and economic factors can explain this irregularity. Kenya is a patriarchal and hierarchical society where titles such as CEO or Chairman make it difficult to question such titleholders due to culturally based respect (fear) of authority. Low financial literacy and fear for authority has led to a situation where some investors ironically do not view the board as answerable to them as owners of the company and are subservient to the wealthier management. This is akin to taxpaying citizens that do not view leaders as their servants and their actions as favours rather than responsibilities.

Shareholder activism is also very low due to high poverty levels in the country. Ownership of listed firms is concentrated in the hands of a handful of wealthy investors who dominate decision making in boardrooms. Therefore a very small percentage of the population is active on the stock market. Most trading volume is mainly done by institutional investors and wealthy individuals.

Many boards of listed firms feel like an old boys club with many of the same old faces serving long stints on some of these boards or holding multiple directorships across several listed firms raising issues of conflict of interest.

Think of the buy-out of Equity Bank’s stake in Housing Finance by Britam. Looking at the directors of these three firms one realizes that they are joined to the hip and many decisions about these firms could easily be discussed over a round of golf by four to five individuals with little or no input from minority shareholders. Similarly the genesis and evolution of wrangles at CMC motors can be attributed to a small clique of shareholders. But, with a growing middle class that is more financial savvy, shareholder activism is bound to increase.

Nonetheless, it was encouraging to hear that at a recent special AGM, minority Safaricom shareholders protested low divided amounts and questioned heavy spending on marketing and corporate social responsibility by management. This is the direction AGMs need to take, where financial statements and company reports are scrutinized and actions that are not in shareholders’ interests questioned and management are forced to justify their actions.  In the mean time, the Capital Markets Authority (CMA) should embark on educational programs on financial literacy to improve corporate governance and encourage citizens and other stakeholders to take part in corporate governance practice and compliance like its Capital Markets National Trivia that is promoting investor education on equity and debt markets.

Additionally, tenure limits and age caps should be introduced to see an increase in frequency of board changes and reduce the number of octogenarians ‘retiring’ into boards. Disclosure and transparency in relation to board remuneration have been addressed in an overdue review of the CMA corporate governance guidelines, but yet to be seen being implemented and enforced. Only 68% of NSE listed firms declared compensation to directors at the end of 2012.

CMA guidelines and many other regulatory pieces of legislation need to be enforced and overhauled to not only to address participation and transparency issues but also to update them in line with international governance trends. Otherwise, as evident in recent corporate scandals, bad ethics is good business… until you get caught.