In June 2023, a business person dismissed an example I gave about Chase Bank while illustrating why he need to enhance governance is his company as a “Big Company Problem.” My efforts to illustrate how the issues were relevant to his business were met with a lot of resistance. For starters, Chase Bank collapsed in April 2016 to the shock and disbelief of many Kenyans both within and outside the financial services sector. Media reports claimed that the directors had violated insider lending regulations and taken loans in excess of KES 13 billion either directly or through associates. The reports also claimed that the 2015 annual financial statements, though not qualified by external auditors, had been falsified.
To drive my point home, I gave an example of one Senior Manager in a medium sized company who was frustrated by his boss, the company’s founder, who had consistently disregarded his advice. For example, the Manager had suggested that the company should diversify the clientele base but the founder disregarded the advice out of hand. At the time, the company’s largest client was accounting for over 60% of the annual turnover. The founder could not appreciate the risk inherent in such overdependence on one client. This issue was similar to an ICT company I interacted with during my banking career. Against the advice of the Finance Manager and the Bank’s Relationship Manager, the company’s founder invested the company’s liquid cash in real estate. Over time, the company’s liquidity position deteriorated to the point where they were unable to pay key suppliers on time. The creditors responded by terminating credit facilities which in turn hampered service delivery and resulted in loss of key clients.
Prior to Chase Bank, Dubai Bank (Kenya) and Imperial Bank had followed a similar path namely insider lending, decline in liquidity and eventual placement in receivership. Outside banking, Uchumi and Nakumatt Supermarket chains had suffered from insider dealings that eventually culminated into excessive debt, illiquidity and eventual collapse.
Micro, Small and Medium Enterprises as well as large companies often suffer from non-existent, poor or weak governance. Some experience the “BIG MAN” syndrome where a major shareholder, founder or owner plays multiple roles, including CEO and board chairman while at the same time ignoring expert advice and input. In some instances, these influential persons usurp the powers of the substantive CEOs and Board Chairpersons thereby concentrating power around themselves. This concentration of power often hinders independent decision-making and creates conflicts of interest, potentially affecting the interests of other stakeholders
The persons also fail to engage experienced and knowledgeable independent directors, experts or advisors sometimes due to fear of losing control. In turn, they miss out on valuable guidance and oversight that could improve their corporate governance practices. This in turn hampers innovation and adaptation to changes in the marketplace as well as risk management. This in turn hinders progress.
Institutions, both large and small must embrace good governance since it helps in creating a transparent, accountable, and responsible environment that contributes to long-term success of an organization. It ensures that the interests of various stakeholders are safeguarded and balanced as well as preventing abuse of power. In addition, good governance supports effective risk management and identification of potential threats and opportunities, helps in attracting and retaining talent and promotes ethical conduct amongst other benefits.
Dr. Weru Mwangi is the CEO & Lead Consultant at Ultimate Management Solutions, a firm specializing in training & consultancy in Finance, Governance, Strategy, Risk Management and Leadership Development. He can be contacted on weru@umslgroup.com
