Importance of sound corporate governance in enhancing investor’s confidence and growth of companies

Over the years, there has been an intentional effort towards enhancing corporate governance in companies, not just in Kenya but worldwide and especially where investors are involved. Corporate governance in Kenya has evolved as witnessed through recent regulations and judicial rulings seeking better governance of both public and private institutions.

An investor must have confidence in the organization, but more so, in the management who are involved in the day to day running of any organization. Where there is no confidence in the management, then investors might be unwilling to engage in investment opportunities which might lead to adverse loss-making and ultimately the running down of an organization as witnessed with Uchumi, Mumias Sugar, ARM Cement, and many others.

Many organizations have seen the fruits of good corporate governance, where the organization is able to achieve long term sustainability. Many organizations have also seen the unfortunate results of poor corporate governance, where some have collapsed, some have witnessed very poor performance while others have been put under receivership or administration.

The importance of corporate governance has seen regulatory bodies come up with regulations to ensure companies survive, and investors are protected. Capital Markets Authority (CMA) has been instrumental in ensuring investor protection, through the code of Corporate Governance Practices for Issuers of Security to the Public 2015. With this code in place, important issues such as legal and ethical compliance, full disclosure of annual reports as well as performance evaluation are taken into account. This code also gives guidelines on multiple directorships, independence of directors, and mandatory professional training for the directors.

With such policies in place, an organization is assured of effective, entrepreneurial, and prudent management that can deliver the long-term success of the company. Where there is good governance, companies operate efficiently, witness long term sustainability, and also retain current investors and encourage new investments. Investors are looking for companies that will be accountable and transparent. This can only be achieved by putting in place sound policies that ensure accountability. 

Conflict of interest is a key issue that can break or make an organization and is something that investors are keen on. Conflict of interest occurs mostly at the board level. This can happen when there is a clash between the self-interests of directors and the needed professional interest. A good example of this is insider trading which destroys credibility or a situation where a board member sits on the board of another organization that may be awarded a contract. Where there is a conflict of interest, decisions will be made to fit personal interests and which will lead to the interest of the organization being overlooked.

Investors are also looking to be part of an organization that has effective decision making structures in place. These structures ensure timely and efficient decision-making processes which ultimately lead to efficiency in the running of the business. One way to understand these structures in any organization is to look at their organizational structure or studying their processes when it comes to investment decisions that they have to make. Sometimes, an organization has too many processes and too many approval levels that sometimes make potential investors shy away from investing.

Investors are also keen to see how a company approaches risks and the kind of mitigations that have been put in place. Investors will be attracted to an organization that has a structured framework to help mitigate risks, such as exit strategies as this assures them that their interests are safeguarded even in times of risks.

The government has been strict with compliance and we have seen regulatory bodies ensuring compliance in their respective sectors. We have seen companies heavily fined and in extreme measures, others shut, due to non-compliance such as submission of tax. Investors do not want to be part of a company that does not comply with the set rules and regulations. It is therefore important to ensure all regulations are dully followed to gain and retain the confidence of potential and current investors.

Improved and open reporting is a key indicator of good corporate governance policy. Investors are watching the performance of an organization and it is only through open reporting that good decisions can be made, both from the investor and the organization. With improved reporting, management is able to make informed and fact-based decisions which ultimately leads to improved sales margins and reduced costs. On many occasions, poor governance is a result of poor reporting which makes it impossible to see mistakes and map put key areas that need improvement.

Where good corporate governance is in place, investors are assured of stability and growth and ultimately good returns. Good corporate governance boosts the reputation of an organization, leads to staff retention, and gives the needed direction a company needs to forge ahead. While every business owner understands why it is important to put in place these policies, many intentionally decide not to adhere to these policies and end up running down the businesses. Even as the government through various agencies move in to help set up sound corporate governance policies, the decision to adhere to these policies rests on the decision-makers, who are the management. They make, or break the organization.