The corporate governance crisis that the Nairobi Hospital’s board has been grappling with since the beginning of this year climaxed this week with the exit of long-serving chairman John Simba.
His exit was preceded by resignations of several directors and came against the backdrop of a shareholders meeting convened on Thursday to replace the whole board.
Even though the hospital is a private company, there are broader lessons to be learnt on the corporate governance challenges facing corporate entities such as Nairobi Hospital, namely, organisations owned by private associations, clubs and non-profit hospitals.
The headline of a story I read in the New York Times several months ago comes to mind: It said, “Hospitals Board Rooms are as Important as Operating Rooms”. Unlike your ordinary limited liability company owned by shareholders, the Nairobi Hospital is owned by a loosely structured corporate formation known as the Kenya Hospital Association.
Indeed, the association is an open-ended membership outfit with diverse and dispersed members. This ownership structure is what has left the hospital vulnerable to capture by a small section of the more organised members of the association.
When ownership rights are thinly dispersed across almost 2,000 members, you will find that only individuals with vested business interests in the company will take the lead when it comes to participation in the company’s affairs.
In contrast, shareholders of limited liability companies always exert pressure on the board even during the periods between elections. In my view, the main corporate governance challenges that the Nairobi Hospital board has been facing are two.
The first is the lack of capacity in management of conflict of interest within the board. The second is failure to maintain transparent ways and systems of managing and dealing with related party transactions.
For instance, as I went I through the company’s registry of litigation, I was surprised to find that some law firms on the panel of lawyers representing the company are owned by board members.
I went through tender documents and examined an audit review of tenders for insurance policies for the year 2019 and found that some of the companies that put in bids for the lucrative business were owned by board members.
I have seen a letter from a regulator in the financial sector that stated clearly that one board member was not fit to be a CEO of a company in that sector. As the corporate governance crisis at the Nairobi Hospital has amply demonstrated, companies owned by associations and other forms of nebulous corporate formations are vulnerable to capture and control by smaller, and more organised members of such associations.
Just the other day, I received a call from a reader who urged me to investigate and write about the corporate governance challenges facing the Nairobi Club.
Another reader called to ask me to keep an eye on corporate governance problems that he claimed were brewing at yet another association, the Institute of Directors of Kenya.
Although the Nairobi Hospital is a private entity, we are now at a point where the company’s affairs must be subjected to public scrutiny and interrogation. And, why should the affairs of a private company be opened to public discussion.First, the Nairobi Hospital is a critical piece of infrastructure in our health delivery system.
Consider the following numbers and statistics: In 2017, the hospital admitted 18,649 patients and served 165,000 outpatient customers. The hospital has an annual turnover of around Sh11 billion – makes profit- or surpluses- of Sh1.8 billion and a workforce of 2,000 employees. Because it is a not-for-profit company, Nairobi Hospital does not pay taxes.
I maintain that public interrogation and scrutiny of its affairs are justified because these not-for–profit companies owned by associations, have a responsibility to demonstrate to the tax-paying public that they are benefitting and getting something in return for tax exemptions we have allowed them to enjoy.
If new directors come on board, the first thing they will need to do will be to look afresh at bye laws of the Kenya Hospital Association and to suggest changes to block individuals with competing interests from the board and secondly, to consider introducing independent directors.I read somewhere that in the United States, an independent board free from influence is mandated by Federal tax regulations.
The Nairobi Hospital must be rescued from the clutches of competing interests.In the old days, individuals who sat on boards of associations, clubs and not- for- profits were respected public figures: men and women or character and calibre, whose only interest in serving was theconsciousness and satisfaction from doing good to society.
You joined the board of Nairobi Hospital to network, make friends and to do good to society.Today, a good number of board members of associations and clubs will be individuals who do business or will have done business with not for profit in the past.