Competition law may impede effective corporate governance

The Kenyan competition law is one of the most protectionist legislation in the world when it comes to safeguarding the public from abuse of economic power by corporates.

It has been argued in several scholarly papers that an over protectionist law may actually be bad for the consumer and the economy.

One school of thought argues that corporate giants spend a lot of money on research and development and also put a lot of effort therefore it is only obvious that they may end up controlling a large percentage of the market.

It is further argued that at times, a near monopoly status is achieved because of the absence of competitor in the market not necessarily due to abuse of dominance or due to employing unfair trade practises in order to achieve this position.

Some corporates attain a dominant position due to innovation and perhaps securing intellectual property rights for their products and services. Therefore it would be unfair to punish them by indirectly legislating market share.

A second school of thought argues that it is indeed necessary to protect the consumer and the public from actions by dominant corporates as there is a likelihood of abuse of dominance in the event that no legislative protection is conferred on the consumers.

The Kenyan Competition law contains an interesting provision on unwarranted economic power under Section 50. I did an analysis of the law and several other jurisdiction laws and found that not many other countries contained this provision.

The Competition Authority of Kenya (CAK) has published guidelines on this provision. It is interesting that this regulation does indeed spill over into boardrooms and may affect cross directorships as it states that unwarranted economic power is deemed to be cross directorships between two entities producing substantially the same goods and services controlling 40 per cent of market share.

It is argued that where a director sits on the board of several companies including competitors then there is likely to be a collusion in decisions to the detriment of the market. Accordingly this law discourages a similar board of directors sitting in the board of competitors.

READ: CAK targets industry cartels with new competition law

While cross directorships are not necessarily banned, it seems they are frowned upon under competition laws. The guidelines set out the process of determining unwarranted economic power by setting out the principles. These include determining the extent to which competition affects the sector, the rate of employment and others.

The CAK has power to review, to receive complaints and to investigate. It can then order a disposal of interests in the affected corporates.

A strict interpretation of these guidelines means then it is not advisable to have one director sitting in various boards of competitors as he is likely to be conflicted in decision making.

Currently governance of corporates is mainly under Companies Act, industry specific laws amongst others. These contain detailed provisions on the issue of conflict of interest and the fiduciary duty of the director to the company in which he governs.

The provision in the competition law may apply where a director is found to use his influence in an injurious manner. The law did not take into consideration that some persons who sit as directors in some companies do so, due to their expertise in the field and perhaps due to lack of alternatives.

If this law were to be strictly applied, then some directors would have to relinquish some of their directorships as they may be deemed to be cross directorships and further if there is a combined share of 40 per cent.