Third Eye

Sound corporate governance secret to success

Friday, August 20th, 2021 00:00 |
NSE 20-Share Index. Photo/PD/FILE

News that the market value of stocks listed on the Nairobi Securities Exchange (NSE) has hit record highs in recent days is breath of fresh air given how depressed Kenya’s economy has been in the last two years.

It could signal that the economy is about to rebound, which would bring relief all around as the fortunes of business start to look up. 

More importantly, however, the rise in market capitalisation also says something about the companies whose shares have recorded highest gains. All of them, without exception, have strong and robust management and oversight institutions.

They have also put in place strong corporate governance structures that ensure they are managed well, hence securing their future.

This is especially so for banks, which face the highest risk of crimes like internal fraud.

What these gains indicate is that even when there is an economic slowdown, businesses that uphold good corporate governance will rise to the top, and when the economy recovers, they are also primed to reap the highest dividends. 

This is an important lesson even for companies that are not listed, particularly Small and Medium Enterprises and start-ups.

Every few decades, something happens that disrupts businesses globally. At one time it was terrorism. Now it is the Covid-19 pandemic.

But as Isadore Sharp pointed out in his book, Four Seasons, The Story of a Business Philosophy, every time there is a downturn in the economy, “you need to support your brand.

Then, when the world becomes a better place again – and it will – you’ve done nothing to compromise the integrity of your market position”.

His thinking sits at the core of good corporate governance principles.

Too often, the temptation to cut corners is all too real, especially in a market like Kenya where official corruption is rife and where approvals and payments can take ages if the hands of officials are not greased.

Despite such challenges, organisations would do well to remain true to their core values and to distance themselves from dealings that would compromise their integrity or brand value. 

Indeed, there is a lesson that Kenyan companies can learn from Hugh Hefner, the legendary American publisher of Playboy Magazine.

When he needed to open a club in New York, according to a new series on Amazon Prime, he had to bribe city officials to get his license.

Not long after, investigations were launched into how he acquired the license.

Although he says he had paid the officials, he opened his books of accounts for public scrutiny, thereby taking the wind out of the sails of the investigations.

However, his initial decision haunted him and his company, although it also inspired his commitment to always play by the book and avoid dealings that could compromise the Playboy brand.

As a rule, businesses that uphold good corporate governance will always be rewarded as the stock exchange has demonstrated this past week.

Notably, businesses do not need to be in the big league to build and uphold strong corporate governance structures.

This, as experience in the growth of organisations has demonstrated, is something that needs to be done from the very inception of companies and throughout their tenure.

When this is done, living and playing by the rules become part of that company’s culture and DNA. It sends a signal to all that this is how that company does business.

As such, even when the leadership of such organisations changes, as is bound to happen periodically, the governance structures will remain in place as a safeguard, shielding staff, shareholders and customers from brand erosion.

From the data available, banks have recorded the highest gains in market value at the NSE in recent weeks.

This is a testament of their resilience and ability to remain focused on their core mandates even when the market has been experiencing turbulence due to Covid-19. 

This is a lesson that other companies ought to learn so that they too can find what works best for them and help them to survive and thrive despite disruptions. 

As banks have demonstrated, corporate governance is a journey, not a destination.

Every day offers an opportunity for improvement, every mistake is an opportunity to learn and every gain a reason to strengthen systems for long-term growth.

Importantly, staff are key stakeholders in that journey, first because they are the living embodiment of corporate culture but also because they stand with the brands when the brands stand with them during difficult times.

It will not come as a surprise that going forward, organisations that had the lowest staff attrition during Covid-19 will thrive compared to those that let their workers go. And it all boils down to good corporate governance. — The writer is a Partner and Head of Content at House of Romford —Mbugua@houseofromford com

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