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Mega corporate scandals erode Kenya’s global competitiveness

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Source: World Economic Forum

Recent scandals involving Nairobi Securities Exchange (NSE)-listed companies have dented investor confidence in Kenya, pulling down the country’s standing in this year’s list of global competitiveness.   

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East Africa’s largest economy is now the world’s 106th most competitive economy out of 144 countries surveyed down from position 102 it held last year, according to the World Economic Forum (WEF).

The Global Competitiveness Report 2012-2013 says Kenya’s ranking plummeted as a result of poor scores in key areas such as ethical behaviour of firms, strength of investor protection, integrity of auditing and reporting standards and the protection of minority shareholders.

High prevalence of communicable diseases and its impact on life expectancy, which stands at less than 57 years, and on the productivity of the workforce has also diluted Kenya’s ranking.

It has not helped that the country’s security situation has deteriorated since last year’s kidnapping of foreigners by Somalia’s Al-Shabaab militants and the subsequent entry of Kenya’s forces into the neighbouring state.

Paul Kamau, a senior research fellow at the University of Nairobi’s Institute for Development Studies, who led the team that conducted the Kenyan survey, told the Business Daily that recent boardroom wars and the resulting negative publicity had adversely affected investor perception of the country.  

“There were a number of boardroom wars going on during the survey period. Such wrangles sometimes scare away foreign investors who may feel that this is not the best place to put their money,” said Dr Kamau.

The boardroom wars that were partly triggered by poor corporate governance, alleged corruption and mismanagement of investor funds have raised questions as to how well minority investors are protected in Kenya.

According to the report, Kenya’s score on ethical behaviour of firms declined, leaving the country in position 102 from last year’s 99.

A similar decline was reported in the auditing and reporting standards score where the country dropped to position 81 from 66.

Dr Kamau said that the drop in auditing and reporting standards’ ranking is linked to the sample of firms that were included in this year’s survey.

“In my view our standards compare well with the global standards,” he said, adding that the ranking will vary depending on the type of firms surveyed.

Kenya’s ranking on the protection of minority investors dropped to 87 from last year’s 78 in line with the overall ranking of investor protection which dropped to 80 from 78.

Kenya, however, scored high marks on the effectiveness of corporate boards improving its ranking to 79 from 94 last year.

Dr Kamau attributes this improvement to an increase in the number of firms  preparing to list on the NSE and are therefore strengthening their boards and systems for compliance.

Kenya has seen some of the most vicious boardroom wars in the past 12 months, top among them at motor dealer CMC and at East Africa Portland Cement — a cement maker.

The bare-knuckle fights, which began late last year, led to the suspension of the two companies’ shares from trading at the Nairobi bourse — a move that Capital Markets Authority (CMA) said was needed to prevent a possible dumping of the stocks.

Last Thursday, a day after the High Court upheld the ban on businessman Jeremiah Kiereini from serving as a director in listed companies, CMA chairman Kung’u Gatabaki said that the market regulator has not had powers to intervene in the running of listed firms but that has since changed.

“We have wide and general powers to intervene to restore proper corporate governance in any listed company,” said Mr Gatabaki.

Early last month, the CMA disqualified former executive directors at CMC Martin Forster and Sobakchand Shah, non-executive directors Charles Njonjo, Peter Muthoka, Jeremiah Kiereini, Richard Kemoli and Andrew Hamilton  from sitting on the board of any public company.

The decision, which is the culmination of an audit of the motor dealer’s activities in the past couple of years that revealed how the CMC management and directors signed misleading financial statements, allowed the firm to adopt risky business models and failed to stop the funnelling of funds into off-shore accounts, causing it huge losses.

“One of our objectives in the next 100 days is to improve confidence in the market by ensuring that we promote good corporate governance,” said Mr Gatabaki.

Other companies that have been on the corporate governance spotlight this year include Centum, which was recently penalised for not issuing a profit warning before announcing a 48.4 per cent drop in its full-year profit.

David Muturi, the executive director of Kenya Institute of Management, and serves as a managing trustee of the Management University of Africa, reckons that corporate governance standards must improve for Kenya to become competitive.

“We need to be competitive and we can only do this if our corporate governance is competitive,” said Mr Muturi.

Kenya’s minority investors have more recently started questioning the management of listed firms, particularly in the wake of the boardroom wars.

Job Kihumba, who chairs the board of the Centre for Corporate Governance, says that when boardroom wars are in the public domain investors may get cautious but it has on the other hand helped directors with unethical motives to know they cannot get away with it.

“It is like squeezing pus from a sore wound…it is painful but then in the end it heals,” said Mr Kihumba, who is also an executive director at Standard Investment Bank. The WEF report is the product of 14,059 interviews in more than 100 countries conducted between January and June 2012 and an executive opinion poll involving more than 14,000 executives.
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