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Personal Finance

Shareholder activism firms up governance

An empty boardroom
An empty boardroom. Investors can help to ensure that errant directors are not left to ruin a company. FILE PHOTO | NMG 

Recently, there have been a lot of corporate scandals in the private sector highlighting the need for good governance.

Shareholders are the owners of any company while directors manage it.

Listed companies usually have more shareholders than smaller firms.

In Kenya, the smallest company has one shareholder. Directors may or may not be shareholders of the company. A firm where the shareholders and the directors are the same people usually has better transparency because information and communication is seamless.

Companies, where the shareholders and directors are different, require a higher level of governance practice due to the information asymmetry. Directors hold day-to-day information on company affairs as compared to the shareholders.

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Therefore, there is a higher standard of governance required in such companies.

Duties of directors and governance practices are set out in the Companies Act and other related laws, for example, the Capital Markets Authority regulations.

Such rules are mandatory and there are consequences of non-adherence to the regulations.

The private sector can participate in the fight against corruption by the use of shareholder activism, which occurs when investors exercise their statutory rights as pertains to the affairs of the company.

One of the rights to exercise is access to information allowing shareholders to scrutinise contracts and books of account.

There are other rights such as voting and inspecting.

There are some times when a particular director breaches one’s statutory obligations and duties to the shareholders.

Stakeholders ought to understand that in such cases they have the power and authority over the errant director in several ways. Today, I will be looking at the power to remove a director and inspection of a company.

Where for any reason, shareholders opine that the actions of a particular director or even the board is not satisfactory and would want to oust such directors, then the same can be done through an ordinary resolution.

The shareholders can pass resolutions stating the reason they would want to remove such a director.

The director ought to be given sufficient notice of the decision by shareholders to oust him. The affected director has 21 days in which to put forth a written response.

In the event one’s submissions as to why he should not be ousted fail, then the resolution stands and the director is removed from office.

This provision allows shareholders to maintain control over the management of the company. They may later opt to file a recovery suit against the affected director for breach of fiduciary and statutory duty once the removal has taken effect.

The second way shareholders can enforce good governance is through court-ordered company inspection. This happens when the shareholders have valid suspicions that all is not well with how the company affairs are managed.

At times directors can conspire to mismanage the company for their own selfish gain. They may give shareholders false information or may engage in high-level corruption to the detriment of the company.

In such cases, it is advisable for the shareholders to apply for an inspection of the company.

The court appoints a professional inspector who will scrutinise the company and this may include forensic audits and others so as to uncover any cases of mismanagement. An inspection report filed in court enables the shareholders to take further actions against the directors.

These are some of the ways shareholders can enforce good governance.

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