Challenges of Effective Corporate Governance in Kenya – a Case for Company Xyz, a Listed Motor Dealer

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TERM PAPER: CHALLENGES OF EFFECTIVE CORPORATE GOVERNANCE IN KENYA – A CASE FOR COMPANY XYZ, A LISTED MOTOR DEALER

EXECUTIVE SUMMARY:
This paper explores the challenges of effective corporate governance in the Kenya and how to address the irregularities experienced in the recent years. It examines the crucial role played by the Capital Markets Authority (CMA), as a regulator of the Nairobi Securities Exchange (NSE) in addition to the role of the NSE in ensuring proper compliance to the Regulator’s laws and guidelines. Moreover, it examines the role of professional institutions such as, The Institute of Certified Public Accountants (ICPAK), in curbing corporate governance irregularities in Kenya. It is based on the case of XYZ Motors, a public listed company, that lost millions of shillings in bad business practices and poor corporate governance structures that allowed top executives and directors to pursue selfish interest to the detriment of minority shareholders. As a result, it offers recommendations on possible cause of action in order to curb corporate governance irregularities that lead to tremendous loss of investor money and confidence, throwing the country’s capital markets into jeopardy.

INTRODUCTION:
Corporate governance has emerged as a major policy concern for many developing countries following the financial crisis in Asia, Russia, and Latin America. The collapse of Enron suggests that even the highly industrialized countries such as the U.S. are not immune to the disastrous effects of bad corporate governance. Studies have shown that low corporate governance standards raise the cost of capital, lower the operating performance of industry, and impede the flow of investment. Following the corporate scandals of Enron, WorldCom, and Tyco, more and more countries have embarked on corporate governance reforms to better protect the interests of investors.

In Africa, significant study has been done on corporate governance, the King’s Committee Report and Code of Practice for Corporate Governance in South Africa published in 1994 continues to stimulate corporate governance in Africa (Rossouw, 2000). Training, technical and awareness raising support has also been extended by the World Bank and the Commonwealth Secretariat to various African countries such as Botswana, Senegal, Tunisia, Mali, Mauritania, Cameroon, Gambia, Mozambique, Mauritius, Sierra Leone and Zambia to help them put in place appropriate mechanisms to promote good corporate governance (Private Sector Initiative for Corporate Governance, 2009). East African Regional conferences were held in Kampala, Uganda, in June 1998 and September 1999 to create awareness and promote regional co-operation in matters of corporate governance. At the June 1998 Conference, it was resolved that each member state of East Africa be encouraged to develop both a framework and a code of best practice, to promote national corporate governance (Private Sector Initiative for Corporate Governance, 2009). Efforts are also under way to harmonize corporate governance in the East African region under the auspices of the East African Cooperation, and through the establishment of a regional apex body to promote corporate governance. In Kenya, the Private Sector Initiative for Corporate Governance continues to liaise with Uganda and Tanzania towards the establishment of a Regional Center of Excellence in Corporate Governance. On October 8, 1999, the Corporate Sector at a seminar organized by the Private Sector Initiative for Corporate Governance formally adopted a national code of best practice for Corporate Governance to guide corporate governance in Kenya, and mandated the Private Sector Initiative to establish the Corporate Sector Foundation (Private Sector Initiative for Corporate Governance, 2009).

According to Ferrell Corporate Governance is the formal system of accountability, oversight, and control aimed at removing the opportunity of employees to make unethical...
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