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Ideas & Debate

State agencies should plug corporate governance gaps

rogue CEO
A board can go rogue. A CEO can go rogue. FILE PHOTO | NMG 

John asked his wife, “Where do you want to go for our anniversary?” She said, “Somewhere I have never been!” He told her, “How about the kitchen?”

And then the fight started.

The 2011 court case titled “Republic versus the Attorney General and two others ex-parte Consumers Federation of Kenya (COFEK)” brought to fore the volatility of power dynamics in the triangular axis between the board of a parastatal, the chief executive officer (CEO) and the parent ministry. In that case, the Director-General of the Communications Commission of Kenya or CCK (now renamed to the Communications Authority) was appointed to his office for a three-year term with effect from July 2008 to expire in July 2011.

Following two and a half years of the ubiquitous board and management two-step tango, the end of the director-general’s term loomed. In December 2010, an appropriate six months before the expiry of the employment contract, he wrote to the chairman asking for renewal of his appointment for a further term. However, the board was not trying to get back on the dance floor with the gentleman and in March 2011, the chairman of the board wrote to the parent ministry, specifically to the Minister of Information and Communication, to advise against the director-general’s renewal of contract.

And then the fight started.

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In a gazette notice dated July 20, 2011, the minister reappointed the director-general against the wishes of the board. COFEK, in keeping with its public interest mandate, went ahead to challenge the appointment in the above-mentioned suit with a key question for determination being whether the minister’s action was abuse of power.

A key point of departure between public and private sector governance is that depending on the instrument that was used to create the parastatal – an act of parliament, legal notice or company incorporation – the appointment of directors is often the sole preserve of the line minister, while the appointment of the chairperson, in some instruments, is left to the President.

Due to drafting oversight on the part of legislative drafters, the appointment of the CEO of some parastatals is left to the minister yet the board is the entity charged with oversight and responsibility over the institution’s financial and operational mandates. As the CEO of a parastatal is the accounting officer for the finances and operations of the institution, it is beyond governance comprehension how anybody other than the board of that institution – who have fiduciary responsibilities drawn from their oversight role - can be responsible for the appointment and removal of that officer.

The court in the CCK case reviewed the relevant administrative framework that guides the governance of parastatals including a circular issued by the Head of Public Service, dated November 23, 2010, where the board was made the appointing authority in the appointment of the chief executive officer of a state corporation.

The court also looked at the State Corporations (Performance Contracting) Regulations 2004, which also gave the board of a state corporation the responsibility of recruiting all staff including the chief executive officer.

The court then concluded that the minister was required to exercise administrative power reasonably, rationally and within the confines of the law. Thus the power to appoint a director-general should follow a decision of the board and only in exceptional circumstances should the minister go against the decision of the board and share his reasons in writing. In such a situation, the minister still has to refer the issue back to the board for a decision and, in the current circumstances, he had failed to do so. The minister was therefore found to have acted unreasonably and therefore unlawfully.

HUMAN FRAILITIES

From a governance perspective, it is imperative to note that the unholy trinity is susceptible to the vagaries of human frailities.

A board can go rogue. A CEO can go rogue. A cabinet secretary can go rogue. In the above example, if the board had gone rogue and was trying to remove an effective CEO while the minister was trying to correct such wrong, then a travesty was committed and a precedent set.

However, if the minister was rogue and in cahoots with the CEO, then justice was served. Whether there are enough checks and balances to ensure that the wrongs of one of the three are corrected is a matter of jurisprudential application.

It is noteworthy, though, that a court will only be limited to the procedural application of the appointments, rather than any underlying governance rot that an institution may be enduring. Such rot is invariably a matter for shareholders to handle.

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