Revealed: The waning value of directors in corporate Kenya

KPMG found that most companies, including those that are listed at the stock exchange, are operating without proper direction and oversight of the risks they face in the business environment, pushing poor governance to the top of the list of corporate Kenya’s challenges.

Damage huge

High exposure of Kenyan corporations in the area of governance is being seen as the product of the big role that old-boy networks are playing in the appointment of directors, and the resulting incest that prevents fresh ideas from entering the boardrooms.

“Often it is the same boardroom boys and a few girls listening to their own voices in one firm after the other, leading to a partial or total blindness whose damage is huge, but difficult to measure,” said Mike Steward of the South Africa-based Centre for Corporate Research.

The old-boy network works against impartial decision-making in organisations, especially in situations where it leads to board members being picked by the managers, according to Sammy Onyango, the chief executive and partner at Deloitte East Africa.

That happens when managers are allowed to suggest names of cronies or friends from the old-boys network for nomination to the board making it a ‘yes outfit’ that is incapable of making quality decisions.

The Capital Markets Authority (CMA) has attempted to introduce the requirement of independent directors in listed companies, but critics argue that lack of enforcement has rendered the regulation ineffective.

Kenya has also been found to have a unique boardroom character that operates in an axis of two extremes.

On the one end of the spectrum are monolithic boards that do not encourage contrarian views but thrive in group-think, while on the opposing end are completely discordant boards where fights and public fallouts are the order of the day.

The monolithic character of the ‘group-think’ boards makes it nearly impossible to unveil the costly decisions they make, but the Kenyan public has recently been treated to some of the most dramatic fallouts in discordant boards.

Such was the case at Housing Finance early this year when long serving chairman Kungu Gatabaki and Beatrice Sabana and Naftali Mogere were ejected from the board with a repeat performance at AccessKenya that led to the exit of KenGen managing director Eddy Njoroge, Ngugi Kiuna and Mungai Ngaruiya from the board.

The KPMG survey found that most boards or their committees do not encourage contrarian views that challenge management positions.

Seventy-three per cent of those polled said such views are either somewhat encouraged or not encouraged at all.

Only 27 per cent said that they encourage contrarian views as a priority.

Nearly 20 per cent of those polled said improvement is most needed in the composition and skill sets of directors, 11 per cent saw lack of commitment from individual directors as requiring top most attention while seven per cent saw poor leadership as the Achilles’ heel of most boards.

Ashif Kassam, the managing partner at HLB Ashvir, a consulting, audit and tax services firm, reckons that lack of preparedness, skills experience to challenge management remains the soft belly of most Kenyan boards and blames the admission of people with no industry or sector knowledge into boardrooms for the anomaly.

“Most companies do not even induct new board members into their vision, strategies and operations,” he said.

“People go straight into the boardrooms, start attending the meetings whenever they are called without background information or knowledge of whatever is going on in the company.”

Buy allegiance

Corporate governance experts also say that remuneration poses the risk of distorting directors’ performance citing the lack of incentive to perform among board members who are poorly remunerated compared to the management of the companies they serve.

“When managers earn supernormal salaries, board members who get little compensation have no commitment or incentive to perform,” said Mr Kassam.

Mr Maina Mwangi, a former managing director of Equity Investment Bank, who has sat in many boards as a manager and director, says findings of the study do not only apply to Kenya but in nearly every part of the world.

“Management is always more prepared than directors, many of whom do not read board papers or do not attend meetings regularly and are therefore not familiar with the company’s operations,” said Mr Mwangi.

Directors normally tread a thin line because they cannot spend all their time quarrelling with the management but have to replace the management whenever they think it is not doing the right thing, said Mr Mwangi.

In the extreme cases, corporate governance is grossly undermined by the award of lucrative contracts to board members to buy their allegiance.

Some board members also get too involved with the operations of the firms they are supposed to supervise that it becomes nearly impossible for them to question the management’s decisions.

Analysts however believe that the performance of every board is largely dependent on its chair and how he manages its deliberations through creation of chemistry among directors and balancing debate between the different wings of the board.

Major challenge

“A strong chairman is critical to create proper relationships and trust between members of the board and the management. It ensures that the chemistry is there,” said Mr Kassam.

In Kenya politics has also been cited as a major challenge to proper functioning of boards especially in state-owned organisations because top managers are imposed by people with strong connections and vested interests.