Personal Finance

Sound management curbs corruption in boardrooms

It is important to remunerate directors well. FILE PHOTO | NMG
It is important to remunerate directors well. FILE PHOTO | NMG 

There have been many corporate scandals in Kenya involving both the public and private sectors which have led to the closure of once promising companies.

In many of the scandals, corruption by the board has been to blame.

A board of directors manages a company in trust for the owners, therefore every decision made must be to increase the wealth of the company and take into account shareholder rights.

Despite this, some boards do not operate in trust for the shareholders, but rather exist for their own good. I have been involved in several such cases where shareholders sued directors due to bad governance.

There are several ways to manage corruption in boards and one is to resort to legal provisions. The Companies Act contains several provisions on directors’ duties and penalises for those who do not uphold their duties as per the law.

Many times punitive fines are provided for. The Penal Code also has provisions on managing errant directors.

One of the provisions deals with fraud by a company director. This is a criminal offence carrying the dual penalty of a fine and imprisonment.

When it comes to managing public corporations, the Constitution contains some governance provisions through the leadership and integrity chapter. The Leadership and Integrity Act contains more detailed provisions of governance in public corporations as does the Mwongozo Code.

Therefore companies aggrieved by corruption in their boards can always resort to existing provisions in our laws to deal with corruption.

Shareholders have the right to raise any issues which they believe the board has not addressed and the board has an obligation to provide necessary information.

The Constitution as well as shareholder rights place the onus on directors to provide this kind of information. Shareholder activism can also be used in order to tame errant boards. The shareholders can vote out corrupt boards. AN AGM is a powerful tool in managing the board.

There are Companies Act provisions for the removal of corrupt directors outside of the AGM.

The board can also have some strategies to minimise corruption. One is to have a properly constituted board.

Other than board diversity, it is advisable to have in place non-executive directors who do not have a direct interest in the company. They are independent and as such re able to make unbiased decisions. In some countries they oversee functions of executive directors.

It is important to have properly constituted board committees which would assist in addressing corruption.

It is advisable to separate audit and finance committees. The finance committee is responsible for preparing books of account while the audit committee is in charge of auditing the books.

Therefore it is important to separate these functions. Furthermore, it is important to have non-executive directors in the audit committee.

A board charter is important as it sets out the principles, objects, vision, goals, amongst others. Having a charter would give directors a better understanding of the purpose of the board.

It is also important to have in place sound contracts for directors. The contracts should set out disallowed activities and contain clauses on conflict of interest, which minimises corruption.

Prevention is better than cure, it is important to remunerate directors well and offer them benefits such as medical, insurance, pension.