Have you ever wondered how companies, including the most successful big-name brands such as Apple, Google, Microsoft, Toyota, and Safaricom and Equity Bank (both in Kenya), made it to their current statuses?
Well, if not, it’s definitely one of the questions for you to self-interrogate. Especially, if you are a futuristic entrepreneur in the making.
The straight response to the above question gets its justification on the concept of Corporate Governance. This two-worded phrase holds the functional components and ultimately the success or failure (sorry to mention) of a project of the status of these big companies.
Corporate governance connects the objectives of a company to the outcomes.
In this article, expect to get most of your key questions about this concept answered to near perfection.
But. First things first.
What is Corporate Governance?
Corporate Governance is the system by which companies are directed and controlled.
For a clearer understanding, the term “Corporate” means communal or shared. And “Governance” involves laying policies in place and monitoring them to ensure proper implementation to the latter.
Thus, good corporate governance has to do with effective and shrewd management of a company that is targeted to extract its maximum value for long-term success.
This is a communal responsibility that’s spread out to all the stakeholders of the company. That’s to say the relationship among the management, the Board of Directors, shareholders, and other key stakeholders has to be straight and clear.
Without a strong corporate power, you shouldn’t expect much from a company in terms of performance, productivity or delivery.
According to Cytonn, Corporate Governance Ranking (CGR) Report in 2018, there is a strong correlation between Corporate Governance and returns on stocks of the listed entities.
From the report, there is an improvement in overall governance. Which in this case was represented by an average score of 2.0%.
This statistic is a reflection of the will of the listed companies to firm up to better corporate governance. Even more, with strong corporate structures, a company’s returns to shareholders is an absolute delight.
With that said, a company which offers weak governance is likely to be on the spot of failure.
In Kenya, three companies have taken center stage when it comes to corporate governance. That’s Safaricom, Kenya Commercial Bank, and Nairobi Securities Exchange.
It’s their routine to record an upward performance trajectory on the share price. They have done this on a purely consistent basis, even dating back to 5 years ago.
Poor Corporate Governance.
On the other hand, we have also witnessed a number of companies, including banks, going down in recent times. If you remember ARM Cement incurred heavy losses for three years in a row – it’s shares were suspended in August 2018.
The retailers Uchumi and Nakumatt also went down the same path. Mismanagement led them to be placed under administration.
Banks such as Imperial bank (2015) and Chase Bank (2016) have been put under receivership by the CBK.
This is just a fraction of failed corporate systems. There are many more if you can look back to what happened to Mumias Sugar, CMC, and Home Afrika among others.
Principles of Corporate Governance.
Here are the key guiding principles to good corporate governance:
The management of a company should be fully accountable for the best interest of human well-being.
This is the very first essence of corporate governance meaning.
To that effect, transparent coverage procedures must be embraced. For example, the use of clear performance metrics, clear communication to the stakeholders, conflict mitigation strategies, and a lot more.
Financial reports should be straightforward always.
2. Efficiency and Effectiveness
You probably understand the usefulness of proper utilization of resources. Since resources, whether it’s raw materials, labor or other factors of production are always a limiting feature of any production, companies need to find a strategy to utilize them more effectively and efficiently.
Otherwise, the whole idea or let’s say the targets of the company to produce goods or services won’t come to be.
The key thing here is that all company operations should be sustainable. So, the board should make decisions regarding the operation of the company by creating and allocating value through sustainable investments.
If things are done the dishonest way, a company is doomed to fail in the long-term. But integrity, truthfulness is what holds the company in place.
Operations should be conducted in a transparent and fair manner. This goes all the way to make it a strong project even in the face of serious scrutiny.
When it comes to matters capability, a few things should be on the table. What skillset and experience does the Board bring on?
This should be definitely addressed. The right combinations of these characteristics define the capacity of the company to strategize and execute the mandate for which they are obligated.
Good leadership is required of the board of Directors and the management. Without good leadership, the chances of failure are up there in the sky.
Here, the balance of power ought to be exercised. No one in the board of Directors or management should have excess powers; if it happens so, this could sabotage the development of the company.
7. Social and Environmental Responsibility
Social mal-practices should not be a part of the company’s undertaking either by default or oversight. By these, I mean scenarios like a company trying to short-change its beneficiaries and customers on certain concessions.
Exploiting employees, polluting the environment without putting in mind the local community. Failing to conserve the natural resources around and even evading taxes and such stuff.
Generally, the company has to operate within the context of the mandate it has towards society.
8. Corporate Compliance
The board of Directors must see to it that the organization complies with the code of conduct as stipulated by the concerned bodies such as Capital Markets.
All the laws, regulations and obligations guiding the companies in Kenya should be observed to the latter. This is important for the company’s safe standing in the market space.
9. Adoption of Technology and Skills
Going by the current state of affairs, organization operations and the strategy to approach them is fast changing. Remember, the organization has to survive and also thrive; making profits.
For this to happen, adopting new skills and modern technologies in the specific industry is one of the key corporate governance principles one has to mark. The Board of Directors or the management has to be updated with new incoming technologies.
This helps to keep the company relevant and competitive all the time.
10. Corporate Culture
For every organization, there are certain beliefs and ethics which are the key platform for policy formulation and implementation.
What is the Purpose of Corporate Governance.
The main purpose of corporate governance is that it helps to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of a company.
The corporate governance serves as the framework that holds intact the vision, mission, and values of the organization. It’s also the platform that becomes a footprint to creating internal business policies owing to the layers of management involved especially in large corporations.
The Board of Directors has the responsibility to set the values and guiding principles of the company. The full-time management executives engage in the daily running of the company.
Corporate governance ensures that the expectations of key stakeholders are exquisitely aligned. That is the goals of shareholders, management, and employees and the local community in which the company operates.
Corporate Governance Structure.
Image: Corporate governance structure for Communications Authority of Kenya
In principle, the corporate structure highlights the organization of a company from its Shareholders, the Board of Directors to the Management who run the daily operations of the company.
Corporate Governance and the Board of Directors.
Many companies are managed by the Board of Directors. This Board is usually elected or appointed by the shareholders of the company to run it on their behalf.
The appointment could be periodic where a certain team serves until a definite period. After which a new board is appointed again.
However, this also largely depends upon the performance of the current board. If they have shown they can take the company to the next levels – consistently racking up profits to the company and therefore enabling the shareholders to extract maximum value from it, then most likely they stay on board.
The entire business operations of the company are entrusted under the watch of the board of directors. If anything, they are the ultimate respondents.
The role of the board of directors encompasses but not limted to the following:
- To define the purpose of the company
- To define the values by which the company will run on a daily basis
- To identify the stakeholders relevant to the company
The board of directors has a long-term view of the company. They envisage where the company should be in the near future and in the long-term.
Composition of the Board of Directors.
The Board of Directors is made of two types of personalities: the executive directors and the non-executive directors.
These are full-time employees of a company. But they work in the senior-most capacities which are concerned with policy-making and strategy crafting.
For example, Equity Bank the position of Chief Executive Officer, Chief Operations Officer, Chief Officer for Human Capital and Administration, etc. All of these are senior positions.
The executive directors are recruited or rather appointed by the Board of directors. As you can guess, these guys are the ones with the lion’s share of earnings because the whole business responsibility lies with them.
2. Non-Executive Directors
These are not employees as you have seen with the executive directors. And to that end, they are similarly not engaged in the day to day running of the company.
Non-executive directors may be people who are working elsewhere but are brought on board because of their expertise or prominence. They are also paid a fee for the services they provide – which on most occasions, is consultancy.
The main reason for bringing on this group of directors is to minimize instances of conflict of interest in an organization. Their broad role can be summarized as follows:
- They contribute to strategic planning
- They scrutinize the performance of the executive directors
- They also provide an external assessment of the risk management
- Resolution of conflicts
The non-executive directors should be people of the highest integrity to be able to handle matters in absolute independence. Besides, they must offer the executives the full support they need to meet the company’s expectations in the end.
Key Positions of the Board of Directors.
- The Chairman
The Chairman is at the summit of the corporate governance structure of a company. They are the leader of the Board of Directors.
The chairman has the sole responsibility to ensure that the company runs efficiently utilizing the potential of all members to their dead best.
He/she chairs the board meetings and ensures that all matters are discussed with the inclusion of every member. They are responsible for time management of these meetings.
- Chief Executive Officer
The CEO is the leader of the executive arm of the board of directors. The daily operations of the company are shouldered by him and his team.
Besides attending the board meetings as a director, the CEO also chairs his own management/executive meetings which could be scheduled to happen every week.
This is the Chief Administrative Officer of an organization. The secretary is the one responsible for providing the agenda and supporting papers for board meetings.
They take minutes of board meetings, advise on procedural matters and sign the notice of the general meetings on behalf of the board of directors.
A secretary may be a member of the board of directors. But in smaller companies, this position is used as a preparation for someone who’ll likely end up being a board director.
Corporate Governance and Management.
The management of an organization combines the CEO as the head and the management committee. And the main purpose of this group is to set, manage and execute the strategic plan of a company.
They are responsible for the daily running of the company under the oversight of the board of directors. They serve to meet three main expectations: strategic planning, risk management, and financial reporting.
Since it’s the duty of the management to execute or implement the tasks as on the strategic plan, they should be clinical on time usage and keep the focus on the long-term goals.
Steps to Enhancing Corporate Governance.
The following are eight key steps for a company to improve its corporate structure:
1. Have in place a properly-constituted board of directors.
Here, you should be looking at things such as the right qualifications and competence especially for the figures of Chairman, CEO and the company secretary.
Independent judgment should be exercised. While the diversity of board members should be seen – gender parity, nationality, regional balance, and age – all these should be observed.
When the board is able to understand their role clearly, they would be lead or guide the company surely on its path of development.
2. Protecting the Investors and Understanding the Shareholder Rights
Investors and shareholders are arguably the backbones of a company in terms of financing. Investors particularly raise the capital needed for the growth of the company.
This takes us to a crucial point; which is equal treatment to all. Each shareholder, irrespective if they are minor or major, should be provided equitable treatment.
There should be transparency in the information flow. This includes information regarding annual reports and accounts as well as the notices of the annual general meetings.
There are different ways to disseminate this information. For example, it could be posted on the company website for access to all, emails or pamphlets. Regular shareholder forums is a crucial part to give the shareholders the perfect opportunity to connect with the company.
3. Maintain High-Standard Ethics
Ethics are a non-negotiable bunch of aspects that a board should definitely put at the forefront. There is no question that the company has all sorts of persons.
And if ethics are not set right, starting with the board itself, then the managers and lower cadre employees won’t respond to any that the board gives.
So, the board should set the highest standards of ethics. They should practice and live them.
A code of conduct should be created to that effect.
And what this means is that all decisions regarding company operations will be required to comply with these values inscribed in the code of conduct.
4. Balance the Economic, Social and Environmental Value
First, the company exists in a social environment. At the same time, the core objective of a company is to register profitable economic returns.
So how does a company go about this?
Well. A company can become a good corporate citizen of the community where it conducts its business on a day to day basis.
This can be achieved via the introduction of programs that seek to solve social and environmental issues that affect the community. The solutions should be long-term.
5. Prioritize Risk Management
All potential risks need to be identified, analyzed and mitigated in good time. Risk management shouldn’t be too late to plunge the company into some trench first – and then looking to pick up from there.
That’s poor corporate governance.
And it starts with the board which needs to put proper systems in place to enhance a number of key development aspects such as accountability, risk management, and internal controls.
A competent Audit and Risk committee should be appointed to review the processes in the company. For example, this committee should ensure timely financial audits and compliance with the financial reporting standards.
The committee should also keep the management reminded, develop and execute appropriate risk frameworks that will be used to handle any risk potentials.
6. Be Transparent in All Processes
Transparency is very key when it comes to investor attraction, company confidence in the markets and shareholder protection. This is also what we call disclosure.
The company, and I mean the board, should encourage the issuance of its detailed annual reports, board members and they are evaluated as well as the remuneration of those members. This is the ultimate act of transparency.
And it enlightens the investors and stakeholders so that they have a great understanding of the activities of the company, its market performance, values, and policies.
7. Proper Management of Stakeholder Relations
All the stakeholders: employees, suppliers, media channels and clients have certain expectations. In the implementation of its strategy, a company ought to come up with policies that can properly manage its relations with a given stakeholder group.
Know who these group of people are and develop a functional feedback mechanism to maintain communication back to the views of the different stakeholders.
That’s when corporate governance becomes effective.
8. Develop a Corporate Governance Framework
This is the last and crucial step in corporate structures. It incorporates the above steps into a framework that can be used as a tool to gauge how corporate governance is faring at the company.
The framework can be used by the board to determine the level of corporate governance in the company. This analysis can be scheduled to happen every year.
From the results provided after the framework analysis, the board can forge new ways to improve the company in this very specific area.
It’s no doubt that with a great Corporate Governance framework, the company’s prosperity is not far from its glory even if this is gradual.
Challenges Facing Corporate Governance in Kenya.
The role of corporate governance in the private sector and public sector can be indispensable. But corporate governance comes with its share of challenges.
If you are light-hearted, thoughts of despair are not rare.
Sometimes, the strategies coming from the board may be received coldly by the lower tier employees. If this happens, the company is set to miss its planned targets.
Perhaps because of poor project receptivity, the tasks were not properly implemented.
The second challenge could come as a result of changes in donor demands. This can definitely shift the control of company matters from the board to the technical staff or management.
What happens is that the corporate governance framework is rendered useless.
Exercising corporate governance may not work with some select companies in Kenya because of the ambiguity in the role of the board and that of the management. One of the commonplace dilemmas in corporate governance is determining if the role of the board is to advise or direct the entire organization.
Yet, some decisions from the board of directors are just not implementable. The appointment or election of the board of directors is also a process that eventually brings about lots of conflicts of interest.
Meaning that exercising good corporate governance may not be as easy as it may be expected.
Most organizations are taking the corporate governance structure path to run their operations. You will find that there is a board of directors and management.
Of course, the shareholders have an extremely big role; but they are always at the background of affairs.
With a good corporate structure, profits for the company and top-value for the shareholders are guaranteed from an organization.
Adhering to the practices of corporate governance structure is what a company needs to prosper.