Good Corporate Governance: Key to Organization’s Growth

Corporate governance is the application of best management practices, compliance with laws and regulations and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of stakeholders.

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.

According to Cytonn Investments Report on Corporate Governance, Investors have lost over 270 billion shillings in situations that are closely linked to the failure of corporate governance and ethics.

The benefits of good corporate governance include: protecting the interest of the investing public, reducing risks of corporate crisis, ensuring the firms have the right processes in place, with all decision making done in a transparent manner as per policy, improving access to funding at better costs, improving firm valuation and share price performance, and generally improving the performance of the entire firm as it has a focus on ensuring corporate decisions result in the application of the highest standards of governance which enhances sustainability in the firm’s growth.

The report noted that 2016/17 has witnessed a notable improvement and focus on corporate governance, leading to reduction in the number of corporate governance issues; this is evidenced by the few number of poor governance cases as well as measures taken to redress the companies that were drowning owing to poor governance such as boardroom changes especially among government-owned entities, which we believe have been as a result of regulations aimed at restoring governance order in the market in pursuit of regaining investor confidence.

Compared to last year, the average performance for companies improved by 4.1 percent to an average score of 65.7 percent, from 61.6 percent in 2016 mainly driven by better disclosures around governance. This is an indication that Kenyan listed companies are firming up to better governance practices, which is expected to lead to better performance of various companies.

Companies also registered better performance on ethnic diversity with an average score of 62.1 percent compared to a score of 59.4 percent registered last year. A higher score on ethnic diversity indicated better assortment in board composition, which improves the quality of decision-making and enhances creativity and innovation translating to better performance by the companies.

The average score on gender diversity, however, declined to 16.4 percent from 18.3 percent in 2016.  According to Cytonn, this is an indication that there remains a lot more to be done by companies with regards to having female members on their boards. The company believes that the full compliance with the CMA’s Code of Corporate Governance Practices will be key in achieving this.

The report also disclosed that poor corporate governance has led to the poor performance of companies such as Mumias, Uchumi and Kenya Airways. Some of this has led to capital levels in these entities shrinking by more than 90 percent. In light of this, there has been rising pressure on the respective boards to act, to ensure continuity of the companies.