19/11/2022

Corporate Governance
and Sustainability
BMC 4201
Week 2-4 –Background and 21 the
Principles of Corporate Governance.

Dr William Murithi PhD. FHEA. CMBE

wmurithi@Strathmore.edu

CoGS continued…..

• Background of Corporate Governance in Kenya

• Reasons for Corporate Governance in Kenya
• Evaluate the approaches to Corporate Governance: rule
based and principle based. 21 principles of Corporate
Governance
• Discuss the different types of Corporations and their
characteristics (Listed Companies, Private Organizations,
Not-For-Profit and Family Organizations)

1
 19/11/2022

Recap: Trivia

• What is corporate governance?

• The corporate governance systems include principles,
policies, procedures
• Which one of the following is not among the five pillars of
good governance?
• Which of the following is not a reason for good corporate
governance?
• What does ECG stands for ?

Background to Corporate
Governance in Kenya

2
 19/11/2022

History of Corporate Governance

• Background of Corporate Governance in Kenya.

• It dates way back in the 16th and 17th century when
partnership was the main form of doing business in
England and India.
• There was no separation of the Board and management;
individuals came together and conducted businesses
without any structures or policies.
• (Mukabwa, J., 2016)

Background of Corporate
Governance in Kenya
• In November 1998, a workshop on the Role of Non-
Executive Directors was held at the Kenya College of
Communications Technology, Mbagathi, Nairobi.
• Nairobi Stock Exchange (NSE), Capital Markets
Authority (CMA), Institute of Certified Public
Accountants (ICPAK) and the Kenya Chapter of the
Association of Chartered Certified Accountants were
present.
• Dominion Consultants Limited organizers
• 2nd meeting March, 1999 at the Whitesands Hotel,
Mombasa

3
 19/11/2022

Background of Corporate Governance in Kenya

2015 CMA gazette the Code of
Corporate Governance Practices “Apply or Explain”
fairness, accountability,
for Issuers of Securities of Public. responsibility and
transparency.
2002 CMA Gazetted Guidelines on CGP
by public Listed Companies. –”Comply “Ticking of a box” and as a result,
and Explain” between 2002 and 2015- Chase
Bank, Imperial Bank, Uchumi etc.
March 1999- Seminar 2-
Develop a Code of Best
Practice for Corporate
Interim committee to be
Government in Kenya.
formulated with a core
October 1999 mandate
Nov 1998- workshop for
non-executive directors –
Private Sector Initiative for Nairobi Stock Exchange (NSE), Capital Markets Authority (CMA)
Institute of Certified Public Accountants (ICPAK), Kenya Chapter of the Association
CoG. of Chartered Certified Public Accountants (ACCA).
Organised by Dominion Consultants Limited

Reasons for Corporate Governance

in Kenya
• The quality of governance at all levels was increasingly
being seen as the most important factor for the success
of both the politico-economy and its institutions.
• Corporate governance was increasingly taking centre
stage, with the privatisation and corporatization of the
economies globally.
• There was greater expectation from society that
corporate organisations, especially private ones, should
take a more leading role in the debate and implementation
of economic revival strategies.

4
 19/11/2022

Reasons for Corporate

Governance in Kenya
• In the face of major scandals leading to the collapse of big
corporations, especially state owned ones, with disastrous
social and economic consequences, it was inevitable that the
wider society, led by the mass media, would start
questioning how these organisations were run.

• Shareholders, especially in publicly listed companies were

becoming increasingly vocal demanding better transparency
and disclosure of information from their directors.

• Regulatory bodies, notably the CMA and the NSE, were

already hinting that they would require good corporate
governance practices amongst the publicly listed companies.

Economic Situation of Kenya GDP

Growth
• Private
Consumption
• Government
consumptions
• Fixed capital
formation.
• Net exports
• Real GDP growth %

10

5
 19/11/2022

21 PRINCIPLES OF
CORPORATE GOVERNANCE

11

Principle 1: Authority and Duties

of Members [or Shareholders]
• Members or shareholders [as owners] of the corporation shall jointly
and severally protect, preserve and actively exercise the supreme
authority of the corporation in general meetings. They have a duty,
jointly and severally, to exercise that supreme authority of the
corporation to:
– Ensure that only competent and reliable persons, who can add value, are elected
or appointed to the Board of Directors;
– Ensure that the Board is constantly held accountable and responsible for the
efficient and effective governance of the corporation so as to achieve
corporate objectives, prosperity and sustainability.
– Change the composition of a Board that does not perform to expectation or in
accordance with the mandate of the corporation

12

6
 19/11/2022

Principle 2: Leadership

• Every corporation should be headed by an

effective Board that should exercise leadership,
enterprise, integrity and judgment in directing the
corporation so as to achieve continuing prosperity
and to act in the best interest of the enterprise
in a manner based on transparency, accountability
and responsibility.

13

Principle 3: Appointments
to the Board
• Appointments to the Board of Directors should,
through a managed and effective process, ensure that
a balanced mix of proficient individuals is made and
that each of those appointed is able to add value and
bring independent judgment to bear on the decision-
making process.
• The Board shall comprise a balance of executive and non-
executive directors, with a majority of non-executive directors.
Independent non-executive directors shall be at least one third
of the total number of Board members.
14

7
 19/11/2022

Principle 4: Strategy and Values

• The Board of Directors should determine the

purpose and values of the corporation, determine
the strategy to achieve that purpose and
implement its values in order to ensure that the
corporation survives and thrives and that
procedures and values that protect the assets and
reputation of the corporation are put in place.

15

Principle 5: Structure and

Organization
• The Board should ensure that a proper
management structure [organization, systems and
people] is in place and make sure that the
structure functions to maintain corporate
integrity, reputation and responsibility.

16

8
 19/11/2022

Principle 6: Corporate
Performance, Viability and
Financial Sustainability

• The Board should monitor and evaluate the

implementation of strategies, policies and
management performance criteria and the plans of
the corporation.
• In addition, the Board should constantly review
the viability and financial sustainability of the
enterprise and must do so at least once every
year.

17

Principle 7: Corporate
Compliance
• The Board should ensure that the
corporation complies with all relevant
laws, regulations, governance practices,
accounting and auditing standards.

18

9
 19/11/2022

Principle 8: Corporate
Communication
• The Board should ensure that the
corporation communicates with all its
stakeholders effectively.

19

Principle 9: Accountability
to Members
• The Board should serve the
legitimate interests of all members
and account to them fully.

20

10
 19/11/2022

Principle 10: Responsibility to

Stakeholders
• The Board should identify the corporation’s
internal and external stakeholders; agree on a
policy or policies determining how the corporation
should relate to, and with them, in creating
wealth, jobs and the sustainability of a financially
sound corporation while ensuring that the rights
of stakeholders [whether established by law or
custom] are respected, recognized and protected.

21

Principle 11: Balance of Powers

• The Board should ensure that no one person

or group of persons has unfettered power
and that there is an appropriate balance of
power on the Board so that it can exercise
objective and independent judgment.

22

11
 19/11/2022

Principle 12: Internal

Control Procedures
• The Board should regularly review systems,
processes and procedures to ensure the
effectiveness of its internal systems of control so
that its decision-making capability and the
accuracy of its reporting and financial results are
maintained at the highest level at all times.

23

Principle 13: Assessment of

Performance of the Board of
Directors
• The Board should regularly assess its performance
and effectiveness as a whole and that of individual
members, including the Chief Executive Officer.
A summary of the major findings together with a
statement confirming that the Board has carried
out a self-assessment exercise should be made to
the annual general meeting.

24

12
 19/11/2022

Principle 14:Induction, Development and

Strengthening of Skills of Board
Members

• The Board should recognize the need for new members

to be inducted into their roles and for all Board
members to develop and strengthen their governance
skills in light of technological developments, changing
corporate environment and other variables.
• The Board should accordingly organize for the
systematic induction and continuous development of its
members.
25

Principle 15:Appointment and

Development of Executive
Management

• The Board should appoint the Chief Executive

Officer and participate in the appointment of all
senior management, ensure motivation and
protection of intellectual capital crucial to the
corporation, ensure that there is appropriate and
adequate training for management and other
employees and put in place a succession plan for
senior management.

26

13
 19/11/2022

Principle 16: Adoption of

Technology and Skills

• The Board must recognize that to survive and

thrive it has to ensure that the technology, skills
and systems used in the corporation are adequate
to run the corporation and that the corporation
constantly reviews and adopts the same in order
to remain competitive.

27

Principle 17: Management of

Corporate Risk

• The Board must identify key risk areas and

key performance indicators of the
corporation’s business and constantly
monitor these factors.

28

14
 19/11/2022

Principle 18: Corporate Culture

• The Board should define, promote and protect the

corporate ethos, ethics and beliefs on which the
corporation premises its policies, actions and
behaviour in its relationships with all who deal
with it.

29

Principle 19: Social and

Environmental Responsibility

• The Board should recognize that it is in the

enlightened self-interest of the corporation to
operate within the mandate entrusted to it by
society and shoulder its social responsibility. For this
reason, a corporation does not fulfil its social
responsibility by short-changing beneficiaries or
customers, exploiting its labour, polluting the
environment, failing to conserve resources,
neglecting the needs of the local community, evading
taxation or engaging in other anti-social practices.

30

15
 19/11/2022

Principle 20:Recognition and Utilization of

Professional Skills and Competencies

• The Board should recognize and encourage

professional development and, both collectively and
individually, have the right to consult the
corporation’s professional advisers and, where
necessary, seek independent professional advice at
the corporation’s expense in the furtherance of their
duties as directors. [This is in addition to and not a
substitute to their personal duty to acquire
competence, training and information that would help
them make informed, independent and astute
decisions on issues relevant to the corporation.]

31

Principle 21: Recognition and

Protection of Members’
Rights and Obligations
• Members of the corporation have a right to
receive any information that would materially
affect their membership, to participate in any
meeting of members and to participate in the
election of directors and be facilitated to fully
participate in all other resolutions of interest to
them as members.

32

16
 19/11/2022

Summary
• There are inherent conflicts of interest in
corporations in which the ownership and management
are separate.
• Objectives of corporate governance:
– To eliminate or mitigate conflicts of interest.
• Particularly those between corporate managers
and shareholders; and
– To ensure that the assets of the company are used
efficiently and productively and in the best
interests of its investors and other stakeholders.

33

Enroll Scandal
• The Rise and Fall of Enron - The Biggest Scandal in the History of
American Finance:
https://www.youtube.com/watch?v=NvslpOUDaHo
• Major Corporate Governance Failures | Enron Scandal | Auditing
and Corporate Governance|:
https://www.youtube.com/watch?v=lycvPmLL8cs
• The Enron Scandal - A Simple Overview:
https://www.youtube.com/watch?v=hwollZoVmUc
• Movie: enron the smartest guys in the room full movie:
https://www.youtube.com/watch?v=_0vRuHn9MmI

34

17
 19/11/2022

FORMS OF BUSINESS AND

CONFLICT OF INTEREST

35

Forms of business
and conflicts of
interest
The form of business will dictate, in part, the
relationship between the owners of the business
and management.
❖The degree of separation may be minimal (e.g., sole
proprietorship), or significant (e.g., large corporation).
❖When there is a separation between owners and
managers, there is a potential for agency problems,
which may affect the value of the business.
❖We will examine three business forms: the sole
proprietorship, the partnership, and the corporation.

36

18
 19/11/2022

Sole proprietorship
• A sole proprietorship is owned and operated by a
single person
• Sole proprietorships are the most numerous in
terms of number of businesses.
• Who bears governance risk in a sole
proprietorship?
– There are few risks with respect to governance from
the perspective of the owner.
– Creditors, including trade creditors, have the highest
risk with respect to governance.

37

Partnership

• A partnership has two or more owner/managers.

• Who bears governance risk in a partnership?
– There are few risks with respect to governance from
the perspective of the owners, with ownership rights
and responsibilities detailed in the partnership
agreement.
– Creditors, including trade creditors, have the higher
risk with respect to governance.

38

19
 19/11/2022

Corporation

• A corporation is a legal entity that has rights similar

to an individual.
– For example, a corporation can enter into contracts.
• Corporations account for most business revenue
around the world.
– Corporations around the world: Limited Company (U.K.),
Gesellschaft (German); Societé Anonyme (France), 公司
(China); şirket (Turkey); บริษท
ั (Thailand)

39

Advantages of the corporate

form
1. A corporation can raise capital.
– Grant ownership stakes (that is, issue stock) or borrow
(that is, issue bonds).
2.Owners need not know how to run the business.
– The corporation hires experts to manage the business.
3.Ownership interests are transferrable.
-The owners can transfer/sell their shares to others.

40

20
 19/11/2022

Disadvantages of the corporate

form
1. Corporations are more highly regulated than are partnerships or sole
proprietorships.
– For example, in the U.S. there are State laws pertaining to corporations
and the Securities and Exchange Commission requires specific
disclosures.
2. Separation of owners and managers.
– This is the agency relationship, in which someone (the agent) acts on
behalf of another person (the principal).
– The potential conflict between owners and managers is the agency
problem or principal-agent problem,
• Principals: shareholders
• Agents: Management and members of the board of directors
– There are costs to this agency relationship arising from conflicts of
interest.

41

3. Forms of business and

conflicts of interest
Characteristic Sole Proprietorship Partnership Corporation

Ownership Sole owner Multiple owners Unlimited ownership

Legal requirements and regulation Few; entity easily Few; entity easily Numerous legal
formed formed requirements

Legal distinction between owner None None Legal separation

and business between owners and
business

Liability Unlimited Unlimited but shared Limited

among partners

Ability to raise capital Very limited Limited Nearly unlimited

Transferability of ownership Non-transferable Non-transferable Easily transferable

(except by sale of
entire business)

Owner expertise in business Essential Essential Unnecessary

42

21