19 July 2010

Kenya: Shareholders Are Watchdogs in Their Companies


A number of people carry out business through companies that they have incorporated.

What is interesting is that most of the shareholders do not know what the law says and are also not aware of what the law provides on good governance and corporate democracy.

It is important for every shareholder to be fully aware of what the law provides in the event of a dispute.

Some of the common cases in shareholders' disputes include misappropriation of funds, negligence and voting powers.

Every shareholder should know that the provisions of the Companies Act on good governance are applicable in management of the company.

Part V of the Act contains provisions on management and administration of the company.

Some of the clauses include provisions on meetings, accounts and audits of the company and provisions on directors' duties.

Each shareholder should be aware that they are supposed to ensure management should adhere to the mandatory provisions of the Companies Act.

The Articles of Association also contains provisions on management.

The company directors and other officials are bound by these articles.

An aggrieved shareholder has a good cause before a court where he can show that the management did not adhere to the provisions in the articles.

In the case of East African Safari Air Limited V Anthony Ambaka Kegode & Another [2006] eKLR, this principle was upheld, that directors cannot make any decision outside the articles of association.

An aggrieved shareholder can also find his remedy in common law provisions.

Directors and management of the company owe the shareholders a fiduciary duty and that is, to run the company according to the incorporating documents.

Any breach can be remedied through principles of common law.

Research has shown there is a very strong correlation between good corporate governance and firm performance.

Where there is bad governance, the firm's performance is poor but where governance is good firms report a better performance than their average counterparts.

Good governance has been emphasised globally especially in the wake of financial scandals.

The Enron scandal in the US paved way for an overhaul of governance rules which are now mandatory under the Sarbanes Oaxley Act.

Failure to comply attracts sanctions against the board.

This Act recognised that most auditors were faced with a conflict of interest as to reporting in favour of the board that hired them on the one hand, vis a vis reporting in the best interest of shareholders on the other hand.

This resulted in the setting up of a quasi-judicial body to oversee and regulate the conduct of auditors engaged by companies.

Good governance is not only important for firm valuations but also important for a country's general economic growth.

Good governance attracts foreign investors to a market while poor governance and inadequate regulatory framework inhibit foreign investment.

Good governance is just as important to private and small firms as it is to listed firms and the economy as a whole.

Other than some of the corporate governance mechanisms being mandatory, it also has an effect on the overall valuation of a private firm.

Good governance is equally attractive to investors in a private company as it is to a listed company.

When a company seeks out financing the financier will conduct a due diligence of the company to find out the risk existing in the company.

Bad governance like lack of accounts or lack of filing of annual returns will discourage the financier.

A company with a track record of mismanagement will get little financing as its liquidity and financial risk would be high compared to a well run company.

Corporate governance is about a company's internal relationships but also covers its relationship to stakeholders.

Stakeholders include suppliers, customers, the Government and employees.

When it comes to suppliers and customers, good governance is attractive.

A company always engaged in internal wrangling would end up losing all its clients and suppliers.

When it comes to the Government and Government agencies, corporate governance mechanisms like accounting standards, adherence to regulation, disclosure polices, access to information and capital inflow all have their role in combating corruption.

Good governance

As it is private companies are part of the supply side of corruption.

Adherence to good governance would see the fall of corruption especially in government agencies.

It is just as important for private and small firms to adhere to good governance as it is to the larger and listed companies.

At the end of the day good governance is good for the company individually as well as the economy as a whole.

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