Why modern boards must lose sleep over governance codes

The Capital Markets Authority (CMA) Code of Corporate Governance for issuers of securities, Central Bank of Kenya’s and Insurance Regulatory Authority’s Corporate Governance regulations require boards to undergo a 12-hour annual training and issue reports on governance around areas such as corruption, money laundering, succession, and sustainability.

The code also requires the listed companies to conduct governance audits every two years. State corporations are also required to conduct governance audits. Some private companies take up governance training and conduct audits.

Mr Benard Kiragu, managing partner at Scribes Services, a corporate governance consultancy firm, also behind Traction School of Governance and Business, speaks to Business Daily on the importance of corporate governance training for private and public boards.

Why is corporate governance training important?

The business case for corporate governance training has no debate. Better governed companies attract better returns, investors are happier and attract talented staff because no one wants to work in an organisation that is tainted. It helps a country to get makeup resources where they lack and reduces the cost of doing business.

Lack of governance would cost companies through issues such as corruption and insider trading that boards need to watch out for.

Does the training only suit senior executives?

Not really. The specific requirements by CMA target top directors. However, our belief is that this trend should cascade downwards. Don't just train the directors only. It needs to be one that cuts throughout the organisation.

That is the reason we introduced a Diploma in Corporate Governance training with the expectation that there will be governance and ethics officers appointed to guide what drives governance culture in organisations.

Are Kenyan firms compliant regarding these rules?

They remain largely non-compliant, especially over the last two years. We have seen people shying away from anything that requires an investment in money because of the uncertainty of Covid-19. However, it also brought us another angle with many trainings available online.

How have private companies complied with the rules at a time we are seeing some fail due to governance issues?

Companies are embracing this, including feeling the need to conduct training and board evaluations, a report on how boards are doing to contribute to the company agenda. Some private companies and smaller businesses may have been left behind but there is an attempt to have them comply.

For the small firms, it may be because of the cost element but it's a worthy investment. A well-run organisation will attract investors.

There are so many venture funds in the country looking for the right companies to invest in. Other than having a sound business plan, governance is key to them and they must get prepared.

Governance and ethics officers feature in most non-government organisations but now this needs to get to the public and private companies as well.

Are all boards aware of these needed trainings and audits?

All boards are aware and they do understand the importance. Everyone is sold on the business case for corporate governance trainings and practice.

So, what is the reason for non-compliance?

I think it’s an unspoken compromise because companies are doing so poorly with some laying off employees or closing down hence it’s not treated as an area of need.

For me, it is a bigger reason to identify areas that the boards need to be trained in especially in the new environment which presents many risks and opportunities.

It is a typical chicken and egg situation — where you feel you don’t have money to invest in training, which in turn would enable a director to serve an organisation better.

No one would fail to conduct a financial audit, for instance, but there is a feeling that they can get away with not carrying out governance audits. It is an area where the Authority needs to enforce and come out strongly on, especially having reduced the frequency of annual audits earlier, so there is no reason whatsoever for this not to be done.

How will the training help close this gap that has made it difficult for the companies to comply?

One of the emerging areas in governance revolves around stakeholder engagement, such as fair treatment of employees and suppliers.

Training should be targeted at identifying areas that companies should focus on as they seek to ensure a return on investment.

The board should approve and periodically review relevant policies and look at the sustainability of the business through succession planning and a focus on environmental, social, and corporate governance requirements.

Serving on a board is no longer an area of prestige as has been perceived in the past.

There is a lot of work to be done by directors beyond considering the financial performance of the organisation. There is a role for boards to play in determining the culture in an organisation. This is also a new area of focus.

Do you see a market for this training?

Yes. Apart from the 12-hour training targeting the board, we introduced a two-year diploma as the first locally available training on corporate governance, targeted at the practitioners in these companies like corporate secretaries, governance, ethics and integrity officers in the region.

Who else should attain corporate governance trainings?

Every organisation should conduct governance audits and trainings. Pension funds, saccos, microfinance institutions, religious organisations, just to mention a few. Governance touches on all aspects of our lives.