Lax regulation can bring down blue chip firms

Good corporate governance can help flag dangers that may cause a company to collapse.

ARM Cement was recently placed under administration in a move to save it from being wound up as it became insolvent. FILE PHOTO | NMG 

BY BASTON WOODLAND

IN SUMMARY

  • Good corporate governance can help flag dangers that may cause a company to collapse.

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Recently, we have seen blue chip companies in Kenya being placed under administration. The good news is, the legislative spirit of the Insolvency Act, 2015 is to encourage administration of a collapsing company as opposed to liquidation.

The Act is designed to promote the rescue culture of collapsing companies by placing the company’s affairs in the hands of an administrator entrusted with the task of promoting the interests of the company as a going concern or if not possible, by achieving a better result for its creditors than would be achieved on an immediate liquidation.

However, this worrying trend of blue chip companies being placed under administration either reveals the ineptitude of companies in applying the Kenyan code of corporate governance thus their unfortunate downfall or the Capital Markets Authority (CMA) is not effectively playing its oversight and regulatory role.

One is left to wonder why a company with eons of presence in the market, making “supernormal profits” and has been trading on the Nairobi Securities Exchange over the years can abruptly collapse and be placed under administration. Few weeks ago, Athi River Mining Cement (ARM Cement) #ticker:ARM was placed under administration in a move to save it from being wound up as it became insolvent.

Corporate insolvency is the inability of a company to pay its debts when they fall due or when the company’s assets are insufficient to discharge its liabilities. The general consequences of corporate insolvency extend far much beyond the company itself, and includes directors losing all or part of their power to control the affairs of the company (if placed under administration).

The directors may also find themselves exposed to numerous litigation. Shareholders may lose all or part of their investments in the company, unpaid creditors may have their own solvency put at risk and employees may find themselves unemployed.

The greater consequence, is that the insolvency of a significant regional company may have a negative impact on the wider economic welfare of that region by driving away foreign investors wishing to inject cash in the capital markets of that region.

'A clear example is the British Investment Bank CDC Group which risks losing Sh14 billion it invested in 42 per cent stake in the ARM Cement. This directly points to the application of our code of corporate governance by listed companies and enforcement of the same by the Capital Markets Authority.

Corporate governance is concerned with the processes, systems, practices and procedures – the formal and informal rules that govern listed companies. It’s basically, what the board of a company does and how it sets the values of the company for an effective management that can deliver the long-term success of the company. However, this governance duty is not singularly bestowed upon the executives alone but transcends to the shareholders, who also have a fair share of responsibility. The shareholders’ role in governance is to appoint suitable and experienced directors and auditors to secure their investments.

The CMA issued guidelines for observance by public listed companies to enhance best corporate governance practices. The code contains mandatory provisions which are minimum standards that issuers must implement to strengthen accountability of boards, financial reports and the proper exercise of fiduciary duties.

A presumption is made that companies will apply these established best practices set out in the code and if they won’t then they have an opportunity to explain to their shareholders why they would wish not to apply the code, and thereafter the shareholders can make an informed judgment as to whether or not such deviation is beneficial to the long-term success of the company.

The objectives of the code are to strengthen corporate governance practices by public listed companies and to promote the standards of self-regulation so as to bring the level of governance in line with international best practices.

At the very heart of the code is the establishment of the audit committee which is composed of at least three independent and non-executive directors who report to the board, and are tasked with overseeing the internal and external auditing, accounting, financial reporting, regulatory compliance and risk management. The success of any public company, I would tell, lies on how effective and transparent this committee is. This is because the committee can decide to “see no evil and hear no evil” whenever irregular and fraudulent financial reporting’s are done with the intention to create a perception of profitability.

BASTON WOODLAND, Commercial lawyer and advocate, High Court of Kenya.

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