SU+ @ Strathmore University Library Electronic Theses and Dissertations This work is availed for free and open access by Strathmore University Library. It has been accepted for digital distribution by an authorized administrator of SU+ @Strathmore University. For more information, please contact library@strathmore.edu 2021 The Promise and reality: winning ways for retail companies in Kenya through corporate governance. Kitonga Noel Mwende Strathmore Law School Strathmore University Recommended Citation Kitonga, N. M. (2021). The Promise and reality: Winning ways for retail companies in Kenya through corporate governance [Thesis, Strathmore University]. http://hdl.handle.net/11071/12501 Follow this and additional works at: http://hdl.handle.net/11071/12501 https://su-plus.strathmore.edu/ https://su-plus.strathmore.edu/ http://hdl.handle.net/11071/2474 mailto:library@strathmore.edu http://hdl.handle.net/11071/12501 http://hdl.handle.net/11071/12501 THE PROMISE AND REALITY: WINNING WAYS FOR RETAIL COMPANIES IN KENYA THROUGH CORPORATE GOVERNANCE NOEL MWENDE KITONGA ADM. NO: 132157 A Thesis Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Master in Laws (LL.M) of the Strathmore University Strathmore Law School Strathmore University Nairobi, Kenya June, 2021 ii DECLARATION I, NOEL MWENDE KITONGA, do hereby declare that this thesis titled ‘The promise and reality: Winning ways for retail companies in Kenya through corporate governance’ is my original work and it has not been previously submitted to any other institution for any qualification. To the best of my knowledge and belief, this thesis contains no material previously published or written by other authors except for where due reference is made. Noel Mwende Kitonga Date 132157 Approval The thesis of Noel Mwende Kitonga was reviewed and approved by the following: - Dr Erick Komolo, Lecturer, Strathmore Law School, Strathmore University Dr Peter Kwenjera, Dean, Strathmore Law School, Strathmore University Dr Bernard Shibwabo, Director, Office of Graduate Studies, Strathmore University iii DEDICATION “The winds that sometimes take something we love, are the same that bring us something we learn to love. Therefore, we should not cry about something that was taken from us, but, yes, love what we have been given. Because what is really ours is never gone forever.” — Bob Nesta Marley — I dedicate this work to Strathmore Law School and most importantly my supportive mother Christine Kitonga and my late father Philip Kitonga for instilling in me the value of education, supporting my academic ambitions and walking this academic journey with me. iv ACKNOWLEDGEMENTS I am most grateful to the Almighty God for granting me the resilience, good health and wisdom to make it this far. My sincere gratitude goes to Strathmore Law School for enabling me actualize this means to my end. I would like to express my heartfelt appreciation to my family for their support, love and encouragement when I needed it most. To my partner, I am grateful for offering me moral support when I felt like giving up and being a diligent reader. Finally, I owe a debt of immense gratitude to my supervisor, Dr Erick Komolo PhD, for his patience, commitment and willingness to share ideas and thoughts on the topic. v ABSTRACT Kenya’s retail sector stands at the second-largest in Africa with 30 per cent formal retail penetration following South Africa’s 60 per cent. As at 2013, the retail sector growth rate was at 8.4 per cent, the highest growth rate ever recorded in Kenya. However, the high growth rate was short-lived as from 2013 to 2017 there was a consistent decrease. Notably, there is a slight increase over the years since 2017, with a 3.9 per cent growth rate recorded in 2019. The retail sector is the 5th largest contributor to Kenya’s gross domestic product with a contribution of about 5.7 per cent as at 2017. With the strong growth rate and major contribution to the GDP, there is no doubt as to why the retail sector is a major area of focus for the Kenya’s Vision 2030 strategy. Unfortunately, a dark cloud of company collapses threatens the retail sector. In corporate governance lies the key to keep corporate failure at bay. This is the promise companies in Kenya have been offered by the extant regulatory framework. However, the reality is a wave of retail company collapses has plagued the Kenyan retail sector. By conceptualizing, problematizing and theorizing retail companies’ practices, the study was able to answer the research questions whether the legal and regulatory compliance framework on corporate governance for retail companies in Kenya is adequate, what is the government’s role in corporate governance and does it influence the collapse of retail companies, what ties bind retail company collapses to regulatory compliance issues as a challenge facing the implementation and practice of corporate governance as drawn from the case studies, and whether there is need for review on corporate governance regulatory compliance by retail companies in Kenya. The study was able to establish that the massive retail company collapses were due to mismanagement exacerbated by the regulatory compliance conundrum facing retail companies. Looking into Uchumi supermarket Plc, Ebrahim supermarket, Ukwala supermarket, Nakumatt Holdings Ltd and Tuskys supermarket there is need for retail companies to establish a proper governance structure as theorized by the stewardship and stakeholder theories, and adherence to the corporate governance principles. The findings of the study have informed the recommendations made herein that call for corporate governance regulatory compliance reforms. vi TABLE OF CONTENTS DECLARATION................................................................................................................................... ii DEDICATION...................................................................................................................................... iii ACKNOWLEDGEMENTS ................................................................................................................ iv ABSTRACT ........................................................................................................................................... v TABLE OF CONTENTS .................................................................................................................... vi LIST OF CASES ................................................................................................................................... x LIST OF STATUTES .......................................................................................................................... xi Kenya ................................................................................................................................................ xi Regional Legal Framework ............................................................................................................. xi International Legal Framework ..................................................................................................... xi LIST OF ABBREVIATIONS ............................................................................................................ xii CHAPTER ONE: INTRODUCTION ................................................................................................. 1 1.1 BACKGROUND OF THE STUDY ....................................................................................... 1 1.2 STATEMENT OF THE PROBLEM ...................................................................................... 3 1.3 RESEARCH OBJECTIVES ................................................................................................... 3 1.4 RESEARCH QUESTIONS..................................................................................................... 4 1.5 JUSTIFICATION OF THE STUDY ...................................................................................... 4 1.6 HYPOTHESIS ........................................................................................................................ 5 1.7 THEORETICAL FRAMEWORK .......................................................................................... 5 1.7.1 Stewardship Theory ........................................................................................................ 5 1.7.2 Stakeholder Theory ......................................................................................................... 6 1.7.3 Relevance of the Theories ............................................................................................... 7 1.8 LITERATURE REVIEW ....................................................................................................... 8 1.8.1 Principles of Corporate Governance ............................................................................... 8 1.8.2 History and Theories of Corporate Governance ............................................................. 8 1.8.3 Corporate Governance and Public Sector Companies .................................................... 9 1.8.4 Corporate Governance and Board of Directors ............................................................. 11 1.8.5 Corporate Governance and Family-owned Companies ................................................ 12 1.8.6 Corporate Governance and Compliance ....................................................................... 14 1.8.7 Knowledge Gap............................................................................................................. 16 1.9 RESEARCH METHODOLOGY .......................................................................................... 16 1.10 LIMITATIONS ..................................................................................................................... 17 vii 1.11 CHAPTER BREAKDOWN ................................................................................................. 17 CHAPTER TWO: KENYA’S CORPORATE GOVERNANCE HISTORY AND LEGAL FRAMEWORK ................................................................................................................................... 19 2.1 INTRODUCTION ................................................................................................................ 19 2.2 WHAT IS CORPORATE GOVERNANCE? ....................................................................... 19 2.3 HISTORICAL BACKGROUND OF CORPORATE GOVERNANCE IN KENYA .......... 20 2.3.1 Postcolonial Period (1964-1999) .................................................................................. 20 2.3.2 Postcolonial Period (1999-2002) .................................................................................. 21 2.3.3 Postcolonial Period (2002-2020) .................................................................................. 22 2.4 CORPORATE GOVERNANCE LEGAL FRAMEWORK IN KENYA ............................. 22 2.4.1 Domestic Legal Framework .......................................................................................... 22 2.4.2 Regional Legal Framework ........................................................................................... 29 2.4.3 International Legal Framework ..................................................................................... 30 2.5 CONCLUSION ..................................................................................................................... 30 CHAPTER THREE: CASE STUDY ON WHY RETAIL COMPANIES IN KENYA ARE COLLAPSING .................................................................................................................................... 32 3.1 INTRODUCTION ................................................................................................................ 32 3.2 UCHUMI SUPERMARKET PLC ........................................................................................ 32 3.2.1 Background ................................................................................................................... 32 3.2.2 Factors Leading to the Collapse .................................................................................... 33 3.3 UKWALA SUPERMARKET............................................................................................... 36 3.3.1 Background ................................................................................................................... 36 3.3.2 Factors Leading to the Collapse .................................................................................... 37 3.4 EBRAHIM SUPERMARKET .............................................................................................. 38 3.4.1 Background ................................................................................................................... 38 3.4.2 Factors Leading to the Collapse .................................................................................... 38 3.5 NAKUMATT HOLDINGS LTD .......................................................................................... 39 3.5.1 Background ................................................................................................................... 39 3.5.2 Factors Leading to the Collapse .................................................................................... 40 3.6 TUSKYS SUPERMARKET ................................................................................................. 41 3.6.1 Background ................................................................................................................... 41 3.6.2 Factors Leading to the Collapse .................................................................................... 43 3.7 CONCLUSION ..................................................................................................................... 44 viii CHAPTER FOUR: TIES THAT BIND THE FACTORS LEADING TO RETAIL COMPANY COLLAPSES TO CORPORATE GOVERNANCE REGULATORY COMPLIANCE ISSUES .............................................................................................................................................................. 46 4.1 INTRODUCTION ................................................................................................................ 46 4.2 THEORIES OF CORPORATE GOVERNANCE ON GOVERANCE STRUCTURE ....... 46 4.2.1 Governance Structure .................................................................................................... 47 4.2.2 Board’s Management and Oversight ............................................................................. 47 4.3 PRINCIPLES OF CORPORATE GOVERNANCE ............................................................. 48 4.3.1 Accountability and Fairness .......................................................................................... 49 4.3.2 Transparency and Disclosure ........................................................................................ 51 4.4 REGULATORY COMPLIANCE BY THE COLLAPSED COMPANIES IN KENYA’S RETAIL SECTOR ............................................................................................................................ 54 4.5 CONCLUSION ..................................................................................................................... 55 CHAPTER FIVE: FINDINGS, CONCLUSION AND RECOMMENDATIONS ........................ 57 5.1 KEY FINDINGS ................................................................................................................... 57 5.1.1 Key Finding I: Kenya’s Corporate Governance Regulatory Framework and its Effectiveness ................................................................................................................................. 57 5.1.2 Key Finding II: Common Factors leading to Retail Companies Collapsing in Kenya . 58 5.1.3 Key Finding III: Ties that Bind Retail Company Collapses in Kenya to Corporate Governance Regulatory Compliance Issues.................................................................................. 59 5.2 CONCLUSION ..................................................................................................................... 59 5.3 RECOMMENDATIONS ...................................................................................................... 60 5.3.1 Self-care Recommendations ......................................................................................... 60 5.3.2 Surveillance and Monitoring Regulatory Compliance Recommendations ................... 61 5.3.3 Legislative Amendments to Harmonise Regulatory Compliance Recommendations .. 61 BIBLIOGRAPHY ............................................................................................................................... 63 Books ................................................................................................................................................ 63 Chapter in Books............................................................................................................................... 63 Journal Articles ................................................................................................................................. 63 Working Papers, Discussion Papers and Research Papers................................................................ 65 Conference Papers ............................................................................................................................ 65 Self-published Articles ...................................................................................................................... 66 Newspapers ....................................................................................................................................... 66 Reports .............................................................................................................................................. 68 Institutional Authors ......................................................................................................................... 69 Dissertations and Theses ................................................................................................................... 69 ix Magazine Article ............................................................................................................................... 69 Internet Resources ............................................................................................................................. 69 Dictionaries ....................................................................................................................................... 70 APPENDICES ..................................................................................................................................... 71 Appendix A – Ethical Clearance Report ........................................................................................... 71 Appendix B – Plagiarism Report ...................................................................................................... 72 x LIST OF CASES 1. Aziz Ebrahim v Ramzan Ebrahim (2020) eKLR. 2. In re Uchumi Supermarkets PLC (2020) eKLR. 3. In re Ukwala Supermarket Limited (2019) eKLR. 4. In re Ukwala Supermarket (Eldoret) Limited (2020) eKLR. 5. Primrose Management Limited & 3 Others v Nakumatt Holdings & Another (2018) eKLR. 6. Republic v Chief Magistrate Milimani & another Ex-parte Tusker Mattresses Ltd & 3 others (2013) eKLR. xi LIST OF STATUTES Kenya 1. Capital Markets Act (CAP. 485A) 2. Capital Markets (Demutualization of the Nairobi Securities Exchange Limited) Regulations (L.N. 87 of 2012) 3. Capital Markets (Securities) (Public Offers, Listing and Disclosures) (Amendment) Regulations (L.N. 36 of 2016) 4. Companies Act (Act No.17 of 2015) 5. Companies Act (CAP 486) 6. Companies (General) (Amendment) Regulations (L.N. 19 of 2017) 7. Constitution of Kenya (2010) 8. Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya (Gazette Notice No. 3362 of 2002) 9. MWONGOZO: The Code of Governance for State Corporations (Public Service Commission and State Corporations Advisory Committee 2015) 10. Nairobi Securities Exchange (Market Participants) Rules (2014) 11. Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance (2002) 12. Prompt Payment Bill (2020) 13. Retail Trade Code of Practice to guide Prompt Payment in the Retail Sector (2019) 14. The Code of Corporate Governance Practices for Issuers of Securities to the Public (Gazette Notice No. 1420 of 2015) Regional Legal Framework 1. CACG guidelines: Principles for corporate governance in the Commonwealth (1999). International Legal Framework 1. Cadbury Report (1992) 2. G20/OECD principles of corporate governance (2015) 3. IAS 16 Property, Plant and Equipment (2003) 4. OECD Risk Management and Corporate Governance (2014) 5. Sarbanes-Oxley Act (United States) xii LIST OF ABBREVIATIONS CACG - Commonwealth Association for Corporate Governance CEO - Chief Executive Officer CFO - Chief Financial Officer CMA - Capital Markets Authority GDP - Gross Domestic Product IFC - International Finance Corporation KCB - Kenya Commercial Bank KIPPRA - Kenya Institute for Public Policy Research and Analysis Ltd - Limited NSE - Nairobi Securities Exchange OECD - Organisation for Economic Co-operation and Development Plc - Public limited company PSCGT - Private Sector Corporate Governance Trust PTA - Preferential Trade Area for Eastern and Southern Africa bank UBA - United Bank for Africa 1 CHAPTER ONE: INTRODUCTION 1.1 BACKGROUND OF THE STUDY Following Kenya’s liberalization from her colonial shackles in 1963, the retail sector started to grow locally as foreign-owned businesses began to decline and a demand to replace them locally arose. The demand saw the establishment of the Nairobi-headquartered chain Chandarana in 1964 followed by Ebrahim supermarket in 1970 and Uchumi supermarket plc in 1975. The three, dominated the industry and over the years welcomed local rivals such as Ukwala supermarket, Nakumatt holdings ltd, Tuskys supermarket and Naivas supermarket until 2018 when international rivals like South Africa’s Massmart Holdings’ merchandise brand Game, Botswana’s Choppies, France’s Carrefour and South Africa’s Shoprite entered the sector. These supermarkets are characterized as the retail giants in Kenya.1 The retail sector is also characterized with small retail companies like Mulleys, GreenMart, QuickMart, Maathai, EastMatt and Cleanshelf supermarkets just to mention a few.2 Kenya’s retail sector stands at the second-largest in Africa with 30 per cent formal retail penetration following South Africa’s 60 per cent.3 As at 2013, the retail sector growth rate was at 8.4 per cent, the highest growth rate ever recorded in Kenya.4 However, the high growth rate was short-lived as from 2013 to 2017 there was a consistent decrease. Notably, there is a slight increase over the years since 2017, with a 3.9 per cent growth rate recorded in 2019. The retail sector is the 5th largest contributor to Kenya’s Gross Domestic Product (GDP) with a contribution of about 5.7 per cent as at 2017.5 With the strong growth rate and major contribution to the GDP, there is no doubt as to why the retail sector is a major area of focus for the Kenya’s Vision 2030 strategy.6 1 Oxford Business Group, The Report: Kenya 2018, 2018, chapter Industry and Retail — on 11 December 2020. 2 ‘Kenya ranked Africa’s second biggest market for retail investors’ Business Daily, 3 March 2015 — on 11 December 2020. 3 Nielsen, Africa: How to navigate the retail distribution labyrinth, 2015 — on 12 September 2020. 4 Mbatia C and Wanjiku A, ‘The collapse of retail chain giants in Kenya: Evidence and lessons for retailers’ KIPPRA, 31 August 2020 — on 11 December 2020. 5 Kenya National Bureau of Statistics, Quarterly Gross Domestic Product Report, 2017— on 15 December 2020. 6 Kenya vision 2030: A globally competitive and prosperous Kenya, 2007, chapter Economic Pillar— on 11 August 2020. 2 The data provided in the Kenya Institute for Public Policy Research and Analysis (KIPPRA) survey7 shows that there is need for immediate intervention. The decrease in growth rate has been attributed to a significant player in the retail sector, the supermarkets. The recent collapse of retail giants like Uchumi supermarket plc followed by Nakumatt holdings ltd, Ukwala supermarket, Ebrahim supermarket8 and recently by Tuskys supermarket9 is of concern. The collapses have been attributed to gross mismanagement by directors, abuse of power,10 poor financial decisions, tax compliance issues and massive losses.11 Evidently, these collapse factors can be summed up to one significant factor, that is poor corporate governance practices. Corporate governance is a scheme that entails the measures that dictated how a company is directed and controlled.12 The Organisation for Economic Co-operation and Development (OECD) argues that corporate governance is a system by which business corporations are directed and controlled. This is made possible by providing a strategic plan where the company’s goals and objectives are set, providing a means of attaining those goals and objectives, and performance monitoring and evaluation.13 These definitions on corporate governance diverge on the notion that a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders does amount to corporate governance; most importantly is corporate governance’s concern with how power is exercised in decision making. The key elements that arise from the various definitions of corporate governance are accountability, fairness and, most importantly, transparency. These key elements have been adopted in the Kenyan corporate atmosphere by enacting them in various legal frameworks such as the Constitution of Kenya 201014, Capital Markets Act15 7 Mbatia C and Wanjiku A, ‘The collapse of retail chain giants in Kenya: Evidence and lessons for retailers’ KIPPRA, 31 August 2020 — on 11 December 2020. 8 White L and Rees L, ‘Retail: How the mighty have fallen in Kenya’ Daily Maverick, 21 February 2019 — on 25 April 2020. 9 Kiruga M, ‘Kenya’s Tuskys on government watchlist after failing to pay suppliers’ [2020] The Africa Report.com — on 19 July 2020. 10 Kahongeh J, ‘The paradox of retail business in Kenya’ Daily Nation, 21 December 2019 — on 26 April 2020. 11 Mbatia C and Wanjiku A, ‘The collapse of retail chain giants in Kenya: Evidence and lessons for retailers’ KIPPRA, 31 August 2020 — on 11 December 2020. 12 Committee on the Financial Aspects of Corporate Governance, Report of the Committee on the financial aspects of corporate governance, 1992. 13 OECD, G20/OECD Principles of corporate governance, OECD Publishing, Paris, 2015, 46. 14 Constitution of Kenya (2010). 15 Capital Markets Act (CAP. 485A). 3 and the Mwongozo: The Code of Governance for State Corporations16 just to mention a few. An in-depth discussion on these frameworks and what amounts to good corporate governance practices shall follow in the study. 1.2 STATEMENT OF THE PROBLEM In the recent years, Kenya has held several trainings and awareness campaigns on good corporate governance practices and enacted various corporate governance legal frameworks, with the aim of having all corporations win by embracing good corporate governance. The government’s emphasis and influence on implementation of corporate governance has been marred by an emerging trend of company collapses in the retail sector. The trend witnessed has been attributed to questionable corporate governance policies and unethical practices. Evidently, a query arises on whether the legal framework on best corporate governance practices in the Kenya, is enabling all companies to prosper as promised. This study will aim to establish whether the legal and regulatory compliance of the corporate governance framework in place, are the reasons as to why retail companies in Kenya are collapsing. 1.3 RESEARCH OBJECTIVES The broad objective of the study will be to explore why retail companies in the Kenya are collapsing in spite of the recent emphasis by the government on best corporate governance practices through various legal frameworks, policies, rules and guidelines. Specifically, the study will seek: 1. To assess the adequacy of Kenya’s legal and regulatory compliance framework on corporate governance for retail companies. 2. To assess how the government’s role in corporate governance is influencing the collapse of retail companies. 3. To utilize selected case studies to analyse the ties that bind retail company collapses to regulatory compliance issues as a challenge facing the implementation and practice of corporate governance. 4. To assess the need for review of corporate governance regulatory compliance in Kenya by retail companies. 16 MWONGOZO: The Code of Governance for State Corporations (Public Service Commission and State Corporations Advisory Committee 2015). 4 1.4 RESEARCH QUESTIONS The following questions will be answered in the study: - 1. What is the legal and regulatory compliance framework on corporate governance for retail companies in Kenya and is it adequate? 2. What is the government’s role in corporate governance and does it in any way influence the collapse of retail companies? 3. What ties bind retail company collapses to regulatory compliance issues as a challenge facing the implementation and practice of corporate governance, as drawn from the case studies? 4. Is there need for review of corporate governance regulatory compliance by retail companies in Kenya? 1.5 JUSTIFICATION OF THE STUDY As explained in the background, sixty per cent of companies in Kenya are companies in the retail sector; family-owned companies forming the bulk of retail companies. Unfortunately, researchers have confined their studies on the impact of corporate governance on state-owned companies, financial institutions and listed companies; blatantly disregarding retail companies. In addition, Kenya’s economic environment has seen an increase of retail companies collapsing, some on the verge of collapse, and others being subjected to receivership. The retail company collapse surge has been attributed to questionable corporate governance policies and unethical practices. Therefore, the need to explore the impact of corporate governance on retail companies and the retail company collapse surge, necessitates this study. This study will identify the legal and regulatory compliance gaps and examine why retail companies are collapsing. There is need to assess whether the rising number of collapsing retail companies could be as a result of regulatory compliance issues as a challenge facing the implementation and practice of the extant corporate governance regulatory framework by retail companies. The potential findings will clarify the regulatory gaps and empower the legislature to pass informed laws on corporate governance regulatory compliance for retail companies. The implication of the study will be that the case for corporate governance regulatory compliance by retail companies will have been established or disproved; hence creating an informed basis for future researchers. 5 1.6 HYPOTHESIS This study hypothesizes that due to the legal and regulatory compliance inadequacies of the extant corporate governance framework, retail companies are collapsing as a result of the regulatory compliance issues as a challenge facing the implementation and practice of corporate governance, and the government’s role in corporate governance. 1.7 THEORETICAL FRAMEWORK Given the complexity of the human mind, various schools of thought have come up with theories to expound on the nature of corporate governance. They are, but not limited to, agency, stakeholder, stewardship, transaction cost, shareholder primary, resource dependence, class hegemony and managerial hegemony theories. It is futile to set out to examine only one or all the aforementioned theories in a bid to best describe corporate governance.17 Nevertheless, a combination of various theories is highly accepted. Therefore, for the purposes of this study, a combination of two theories -namely stewardship theory and stakeholder theory - are going to be used to theorize corporate governance. Indubitably, the two highlighted theories are paramount in understanding the concept of corporate governance, as they are the baseline for the other theories. 1.7.1 Stewardship Theory Stewardship theory is defined as “a steward protects and maximizes shareholders wealth through firm performance, because by so doing, the steward’s utility functions are maximized.”18 In theory, the relationship entails the shareholders empowering trust upon the directors or managers – who are the stewards- and in return the stewards protect and maximize the shareholders’ wealth. The assumption is that the stewards are motivated and fulfilled upon the company’s success, therefore, reinforcing the notion that the performance of a company directly reflects on the stewards’ performance.19 To cut costs arising from employing a chief executive officer (CEO) this theory advocates for the chairman of directors to hold the position of CEO so as to establish clear leadership.20 The 17 Abdullah H and Valentine B, ‘Fundamental and Ethics Theories of Corporate Governance’ (4) Middle Eastern Finance and Economics, 2009, 88. 18 Davis J, Schoorman F and Donaldson L, ‘Toward a stewardship theory of management’ 22 (1) The Academy of Management Review, 1997, 20. 19 Daily C, Dalton D and Cannella A, ‘Corporate governance: Decades of dialogue and data’ 28 (3) The Academy of Management Review, 2003, 371. 20 Gakeri J, ‘Enhancing Kenya’s securities markets through corporate governance’ 3 (6) International Journal of Humanities and Social Science, 2013, 94-117 6 rationale behind the advocacy is, directors as stewards share common goals with the shareholders. Stewardship theory has been largely adopted by companies that use the Japanese model in incorporating corporate governance.21 Companies under this model demand for the promotion of honour and dignity. As a result, the theory has faced its fair share of criticism. Directors are expected to act as selfless stewards; in the event the company is disgraced it is not uncommon to hear reports of voluntary resignation or suicide by the directors due to the cultural influence. Secondly, the directors are bound to make decisions that may conflict and endanger the interest of the shareholders due to the psychology of human nature that dictates that an individual stand is bound to change dependent of the extant environment and his interaction -either competitive or collaborative- with others.22 The third critique is on the assumption to be a steward or agent is as a result of a rational process.23 This assumption has baffled many schools of thought, as scholars, bearing in mind the intricacy of the psychology of human nature, find it hard to comprehend that an individual can rationally decide that it is in his nature to be a steward. The stewardship theory runs counter to the rational choice theory, where individuals are presumed to act only in ways that maximise their personal interests. Therefore, the assumption has been critiqued to work where the company’s interests happen to coincide with the personal interests of the CEO. 1.7.2 Stakeholder Theory Stakeholder theory, gradually developed by Freeman over the years since 1984 (2010)24, incorporates the management’s liability to a broad range of stakeholders. The theory argues a company is an interrelationship of stakeholders who influence it both internally and externally.25 The theory assumes that shareholders are not the only group of individuals who have interests in the company. Rodriguez et al (2002)26 adopted a stakeholder classification; 21 Ungureanu M, ‘Models and practices of corporate governance worldwide’ Centre for European Studies, CES Working Paper Series 4 Paper Number 3(a), 2012, 625- 635— on 9 July 2020. 22 Wearing A, ‘Economic growth: Magnificent obsession’ 45th Australian and New Zealand Association for the Advancement of Science Congress, Perth, August 1973. 23 Pastoriza D and Ariño M, ‘When agents become stewards: Introducing learning in the stewardship theory’ Humanizing the Firm & Management Profession organised by the IESE Business School, Barcelona, 30 June - 2 July 2008. 24 Freeman R, Strategic Management: A Stakeholder Approach, Cambridge University Press, Cambridge, 2010. 25 Larson S, ‘Stewardship theory, stakeholder theory and convergence’ Wordpress, 2013 — on 2 July 2020. 26 Rodriguez M, Ricart J and Sanchez P, ‘Sustainable development and sustainability of competitive advantage: A dynamic and sustainable view of the firm’ 11 (3) Creativity and Innovation Management, 2002, 135- 146. 7 namely consubstantial, contractual and contextual stakeholders. The consubstantial stakeholders are involved with the existence of the company; they are mainly the shareholders, investors and employees. The contractual stakeholders have a contractual relationship with the company; they mainly are suppliers, customers and financial institutions. Lastly, contextual stakeholders are the spokespersons of the social-economic environment the company operates in; they are the local communities, government, trade associations and political groups. When it comes to the board of directors, the theory is interested more in its decision making. The theory in a bid to level the playing field for all stakeholders, rationalizes that all stakeholder interests have an intrinsic value27 when making a decision. Evidently, directors as trustees, are obliged to balance the interests of all stakeholders in a socially responsible manner.2829 Ideally, the theory aims to achieve a company’s goals and visions by merging ethics and economics together. As seen above, stakeholders play a key role. However, that does not guarantee success. This theory has its fair share of criticisms due to its main gospel. The first critique revolves around the stakeholders’ key role. Ironically, despite the stakeholders’ contribution to the company’s success as compared to shareholders, they are ignored as their influence on the company is minimal as they have no voting rights. Secondly, it is impossible to make decisions especially whilst taking into consideration everybody’s interests. Ideally, this theory will best apply for small family-owned companies. 1.7.3 Relevance of the Theories The two theories, as discussed herein above, play a key role in this study as they establish the fiduciary duties of the directors or managers, the key players to the success of a company and they all resonate with the current trends in corporate governance in Kenya especially by retail companies. Majority of the retail companies in Kenya are family-owned hence the stakeholder theory is applicable when it comes to corporate governance. As earlier alluded to, a blend of two or more theories is suitable for corporate governance to prosper. Therefore, I propose to apply the stakeholder theory and the servant-leadership advocated for in the stewardship theory as this is an apt blend for retail companies in Kenya. 27 Donaldson T and Preston L, ‘The stakeholder theory of the corporation: Concepts, evidence and implications’ 20 (1) The Academy of Management Review, 1995, 65 - 91. 28 Freeman R, ‘A stakeholder theory of modern corporations’ 3 Perspectives in Business Ethics Sie, 2001. 29 Freeman R, ‘A stakeholder theory of modern corporations’ in Beauchamp T, Bowie N (eds) Ethical Theory and Business, 7th ed, Prentice Hall, Upper Saddle River, 2003, 56-65. 8 1.8 LITERATURE REVIEW 1.8.1 Principles of Corporate Governance The principles, as per the understanding of the concept of corporate governance discussed earlier on, are fairness, accountability, disclosure and transparency. In the international sphere, this study will draw the observations made by two celebrated scholars; namely Solomon J and B Tricker. Solomon J in his book30 establishes the principle of accountability by studying the role and responsibilities of the directors. B Tricker in his book31 gives us a global view of corporate governance as he discusses the principles, codes and theories of corporate governance. Tricker stands out as one of the scholar researchers ought to pay attention to as he discusses the major aspects of corporate governance. Unfortunately, his work like many before and after him, use public and state-owned corporations as the case study to draw findings. The OECD, published principles of corporate governance32 as a guideline for countries to establish their own principles in the wake of globalization. These principles have been adopted globally and Kenya is no stranger to them. They entail rights of shareholder, equal dealings with shareholders, role and obligations of the board, stakeholders’ interests, integrity, disclosure and transparency. The same is reflected in the Kenyan legal framework, case in point the Companies Act33 as discussed herein below. 1.8.2 History and Theories of Corporate Governance Solomon and Solomon34 argue that the evolution of corporate governance can trace its roots to the 1980s, when stock market crashes were recorded in various parts of the world. The crashes were characterized by corporations failing due to poor governance practices. In the 1990s, two dominant corporate governance models were adopted globally, namely the insider model and the outsider model of corporate governance. The insider model of corporate governance, developed by countries that followed civil law, mainly focused on the interests of stakeholders. The outsider model, developed by countries that had and followed the traditions of common law, mainly focused on the shareholders’ returns or interests.35 Although the two models were different, they had a few similarities such as the shareholders power to appoint and delegate 30 Solomon J, Corporate Governance and Accountability, 2nd ed, John Wiley & Sons, Hoboken, 2007. 31 Tricker B, Corporate Governance: Principles, Policies and Practices, 2nd ed, Oxford University Press, New York, 2012. 32 OECD, G20/OECD Principles of Corporate Governance, OECD Publishing, Paris, 2015. 33 Companies Act (Act No.17 of 2015). 34 Solomon J and Solomon A, Corporate governance and accountability, 1st ed, Wiley, New York, 2004. 35 Corporate Law Economic Reform Program and Australia Treasury, Directors’ duties and corporate governance: Facilitating innovation and protecting investors, Australian Government Publishing Service, 1997. 9 their authority to the management. Nevertheless, some countries adopted both models establishing a blended corporate governance structure.36 Ruparelia and Njuguna37 give an in-depth glimpse into the evolution of corporate governance and the lengths the world leaders went to in promoting corporate governance. Corporate practices, policies and corporate law within Kenya have been heavily “borrowed” mainly from the United Kingdom. Various institutions have been established such as, the Private Sector Corporate Governance Trust (PSCGT) which in 2002 was renamed the Centre for Corporate Governance of Kenya,38 the Pan African Consultative Forum for Corporate Governance, Kenya Shareholders Association, Institute of Directors and the Consultative Forum for Chairmen of State-owned Corporations in Kenya.39 Although the institutions were established with a view to guiding all corporations in the best practice of corporate governance, they have alienated themselves from the private retail sector as they lay emphasis on establishing guidelines and policies for listed companies, state-owned corporations, the banking sector and universities in Kenya. Corporate governance in Kenya rooted itself in the Constitution.40 Over the years, through the enactment of the Companies Act 201541, Capital Markets Act42 and Mwongozo: The Code of Governance for State Corporations43 corporate governance has been established in Kenya’s legal and regulatory framework. 1.8.3 Corporate Governance and Public Sector Companies Public sector companies comprise both listed companies and state-owned companies. As seen from earlier discussions, the interaction of corporate governance and public sector companies has been over-researched. Some of the key scholars on corporate governance and Kenyan’s 36 Solomon J and Solomon A, Corporate governance and accountability, 1st ed, Wiley, New York, 2004. 37 Ruparelia R and Njuguna A, ‘The Evolution of Corporate Governance and Consequent Domestication in Kenya’ 7 (5) International Journal of Business and Social Science, 2016, 153-163. 38 ‘Centre for Corporate Governance -Our history’— on 25 July 2020. 39 ‘Centre for Corporate Governance -Our history’— on 25 July 2020. 40 Constitution of Kenya (2010). 41 Companies Act (Act No.17 of 2015). 42 Capital Markets Act (CAP. 485A). 43 MWONGOZO: The Code of Governance for State Corporations (Public Service Commission and State Corporations Advisory Committee 2015). 10 public sector, for the purposes of this study, are Lois Musikali, Kiarie Mwaura, Benjamin Mulili, Eric Ernest44 and Jacob Gakeri. Both Lois Musikali45 and Benjamin Mulili46 agree with Solomon and Solomon (2004)47 that a number of developing African countries have embraced corporate governance. However, the adoption of the corporate governance concepts has faced its fair share of challenges. The most dominant challenge is the unstable political atmosphere in African countries, including Kenya. The political regime has established weak market economies set apart by state-owned corporations, intertwining affiliations between governments and the financial sector, and weak legal frameworks. They both agree that Kenya is no stranger to the predicament that has befallen many African countries, hence indirectly insinuating that the lack of a tailor-made corporate governance legal framework has led to various companies collapsing. Lois Musikali studies the collapse of Uchumi supermarket plc while Benjamin Mulili studies the collapse of public universities in Kenya. Kiarie Mwaura (2007) 48 explores the environment of state-owned corporations in Kenya. He does this by delving into the historical development of the said corporations, and investigates the challenges that prompted legal framework reforms towards best corporate governance practices. He highlights that the management of state-owned corporation is often challenged by overlapping laws. To address the challenge posed by the overlapping laws, his study recommends streamlining legislation governing state-owned corporations. Jacob K Gakeri (2013) 49 investigates the challenges and identifies the prospects for enriching the securities market in Kenya by exploring and being conscious of the significance of corporate governance in the securities market. Kenya’s securities market is mainly dominated by listed companies. Once a company is listed in the securities market it becomes a public company by default. He concludes that the weak corporate governance legal framework, the 44 Mang’unyi E, ‘Ownership structure and corporate governance and its effects on performance: A case of selected banks in Kenya’ 2 (3) International Journal of Business Administration, 2011, 2-18. 45 Musikali L, ‘The law affecting corporate governance in Kenya: A need for review’ 19 (7) International Company and Commercial Law Review, 2008, 213-227. 46 Mulili B and Wong P, ‘Corporate governance practices in developing countries: The case for Kenya’ 2 (1) International Journal of Business Administration, 2011, 14-27. 47 Solomon J and Solomon A, Corporate governance and accountability, 1st ed, Wiley, New York, 2004. 48 Mwaura K, ‘The failure of corporate governance in state owned enterprises and the need for restructured governance in fully and partially privatized enterprises: The case of Kenya’ 31 (1) Fordham International Law Journal, 2007, 34-75. 49 Gakeri J, ‘Enhancing Kenya’s securities markets through corporate governance’ 3 (6) International Journal of Humanities and Social Science, 2013, 94-117. 11 Capital Markets Authority’s failure to enforce guidelines for public listed companies, and the defiant corporate culture, have resulted in a weak corporate governance system in Kenya. 1.8.4 Corporate Governance and Board of Directors The link between corporate governance and board of directors has been an area of interest for various scholars. For the purpose of this study, Monks & Minow, the Cadbury Committee, the Sarbanes-Oxley Act, Eric Ernest and Kiarie Mwaura, shall be relied on as they advocate for independency within the governance structure. Monks & Minow (1996)50 opine that one of the most prominent groundbreaking work done in the area was by the United Kingdom’s Committee on Financial Aspects of Corporate Governance (1992) (the Cadbury Committee), chaired by Sir Adrian Cadbury. The Cadbury Committee published the Cadbury report endorsing the composition of company boards and accounting systems to reduce corporate governance risks and failures. The report encompassed four key aspects of corporate governance namely, accountability, responsibility, fairness and transparency.51 By establishing a board of directors, whose responsibilities and roles were clear and different from those of the company’s managers, the report fostered the principle of accountability. The establishment of checks and balances in the company’s governance structure by ensuring that unlimited power is not bestowed on one person, fostered fairness. A harmonious board encompassing both executive and non-executive directors, fostered accountability, responsibility and independence. The principle of transparency was fostered through ensuring the board is always transparent in its governing of the company. The authors of the Sarbanes-Oxley Act52 with a view to protect shareholders, employees and the public from accounting errors and fraudulent financial practices, they made it mandatory for the board of directors in public companies to be dominated by independent directors. Their reasoning was that executive directors cannot be objective in the oversight of management since they form part of the management. In turn, the Act reinforced the principles of responsibility, accountability and transparency. 50 Monks R and Minow N, Watching the Watchers: Corporate Governance for the 21st Century, 1st ed, Blackwell Publishers, Cambridge, 1996. 51 Committee on the Financial Aspects of Corporate Governance, Report of the Committee on the financial aspects of corporate governance, 1992. 52 Sarbanes-Oxley Act (United States). 12 Eric Ernest (2011)53 argues that weak corporate governance practices, poor management and conflict of interests has resulted in poor governance of financial institutions, specifically banks. He highly recommends the adoption of independent boards, as he deduced from his study that banks with an independent board performed better. His study advocated for the principle of accountability and responsibility. Kiarie Mwaura (2012)54 makes a case that companies owe a duty of care to the community to protect them from the wrongs committed by the directors who escape liability by hiding behind the company’s veil. He lays emphasis on the necessity to have legal reforms towards the enforcement of this duty. In his critique on reforming the duties of directors (2019)55 he explores the protection of investors’ interests by the codification of the fiduciary duties through the Companies Act and makes recommendation for reforms of the regulatory framework for directors. The Companies Act56 codified the common law principles of care and skill. His case study insinuates that applying common law principles without modifying the same to suit the current market environment is a recipe for disaster. Nevertheless, he champions for the adherence of high standards of care and skill by the directors of a company. 1.8.5 Corporate Governance and Family-owned Companies Sir Adrian Cadbury (2000)57 highlights the peculiar advantages and challenges that face family-owned companies in a highly competitive global economy. Making use of case studies to demonstrate corporate governance structures within family-owned companies, his report establishes the distinction between family-owned companies and other forms of companies. Jaffe D and Lane S (2004)58 argue that good corporate governance practices are key to sustaining a family dynasty. They discuss the key challenges that a family must face in order to create an effective dynasty over generations and advocate for the establishment of proper corporate governance structures and succession plans. 53 Mang’unyi E, ‘Ownership structure and corporate governance and its effects on performance’ 2 (3) International Journal of Business Administration, 2011, 2-18. 54 Mwaura K, ‘Internalization of costs to corporate groups: Part-whole relationships, human rights norms and the futility of the corporate veil’ 11 (1) Journal of International Business and Law, 2012, 85-110. 55 Mwaura K, ‘Reforming the duties of directors under Kenyan company law: A critique’ 30 (4) European Business Law Review, 2019, 617-631. 56 Section 145, Companies Act (Act No.17 of 2015). 57 Cadbury A, Family Firms and Their Governance: Creating Tomorrow’s Company from Today’s, Egon Zehnder International, London, 2000. 58 Jaffe D and Lane S, ‘Sustaining a family dynasty: Key issues facing complex multigenerational business and investment owning families’ 17 (1) Family Business Review, 2004, 81-98. 13 Ward J (2007)59 argues that renewing effective ownership agency at different stages in family business development is crucial to sustaining the family business advantage in performance. In creating a family business dynasty, the governance of the family-owned company evolves reflecting the various stages of growth in the family and the business. He alludes that governance in family-owned companies seeks to establish productive, procedural engagement across the system as opposed to establishing boundaries between ownership and control and elucidating decision-making powers. As a result, he advocates for family-owned companies as they concentrate control lowering the cost of governance and they tend to uphold the stakeholder theory. Mandl (2008)60 alludes that the inter-relationship between the family and the business to be the most crucial characteristic of a family-owned company. The overlap between family, business and ownership presents a challenge if not well-balanced. The overlap is often challenged by conflicts on future business plan and business transfer, choice of managers, unilateral decision making by a fraction of the family members, remuneration of the family members doubling as company employees and distribution of profits as opposed to channeling the funds back in the company as capital are bound to arise. Consequently, Mandl advocates for corporate governance to take into account the developments within both the company and the family by regulating the relationship during implementation. International Finance Corporation (IFC) (2018)61 in acknowledging the corporate governance challenges faced by family-owned companies elaborates the three stages of family-owned business: the founder stage, the sibling partnership stage and the family confederation stage also known as the cousin stage. As a business goes through the various stages, the interests in the business increase evolving the governance of the business from a simple governance structure to a more complex one. To mitigate the governance challenges, the IFC handbook identifies globally accepted best corporate governance practices in family-owned companies and suggests practical approaches to familiar family-owned companies’ governance challenges. 59 Ward J, ‘How governing family business is different’ in Steger U (ed), Mastering global corporate governance, 1st ed, John Wiley & Sons, Inc, Hoboken, 2007, 135-167. 60 Mandl I, ‘Overview of Family Business Relevant Issues’ Austrian Institute for SME Research, Contract No. 30- CE-0164021/00-51, 2008 — on 10 June 2020. 61 Abouzaid S, IFC family business governance handbook, 4th ed, International Finance Corporation, Washington DC, 2018. 14 Stephen Moche (2014)62 illuminates the dominance family-owned companies have in the Kenyan economy; whereby the NSE is largely dominated by family-owned listed companies. His study takes the empirical approach to focus on the financial performance of the listed family-owned companies based on their implementation of corporate governance. The study concludes that there is no relationship between corporate governance and firm performance of listed family-owned companies in Kenya. Consequently, the study advocates for the adoption of corporate governance practices to foster winning ways for family-owned companies. Cynthia Kagiri (2019)63 argues that there is need for the extant Kenyan corporate governance regulatory framework to recognise the influence family-owned companies have as a form of business essentially touching on shareholder agreements and family councils, by implementing good corporate governance in family-owned companies in codes of general application. The reasoning corroborating her recommendation was that family-owned companies form at least sixty per cent of companies registered in Kenya, and that they greatly influence various industries, markets and groups of stakeholders within the country. She studies family-owned companies that hold a massive share in the retail sector to investigate the link between corporate governance and family-owned companies by investigating the corporate governance challenges and structures within the said companies. Her study concludes that family-owned companies in the retail sector have been adversely impacted by poor corporate governance practices, hence justifying her recommendation. 1.8.6 Corporate Governance and Compliance Bruno V and Claessens S (2007)64 reiterates that regulation is key to good corporate governance practice. By looking into various corporations across the globe, the study was able to conclude that the corporate governance practices in a given company and its country’s regulatory system greatly influence its valuation, hence the varying levels of corporate governance practices and regulation among the countries. 62 Moche S, ‘Corporate governance and firm performance of listed family-owned firms in Kenya’ Published Msc Thesis, University of Nairobi, Nairobi, 2014. 63 Kagiri C, ‘The treatment of family-owned companies by the existing corporate governance framework in Kenya: A case for review’ Published LL.M Thesis, University of Nairobi, Nairobi, 2019. 64 Bruno V and Claessens S, ‘Corporate governance and regulation: Can there be too much of a good thing?’ World Bank, Policy Research Working Paper Number 4140, 2007 — on 10 June 2020. 15 Cave J (2013)65 argues that an appropriate corporate governance regulatory framework must be established along a spectrum of no-regulation, self-regulation, co-regulation and statutory regulation. The choice between either self-regulation -that is principle-based approach- or statutory regulation -that is rule-based approach- relies on a company’s settings and environment. Nakpodia F, Adegbite E, Amaeshi K and Owolabi A (2018)66 admires rule-based regulations for being clear, concise and certain, eliminating ambiguities. However, this rule-based approach is marred with ever-increasing bureaucracies. Alternatively, the principle-based approach makes corporate governance compliance voluntary. Companies are required to either comply with the set regulations or explain in the event that compliance cannot be achieved. However, the principle-based compliance approach has its fair share of woes such as lack of uncertainty, accountability issues and a blurred distinction between minimum standards and best practice of corporate governance. The study points out that despite the rule-based approach being rigid, it enables the government to intervene, whereas the principle-based approach often faces challenges with issues of ethics and morality for its leniency. Nakpodia F et al advocate for an integrated regulatory approach to corporate governance supported by a multi-stakeholder co-regulation strategy for Sub-Saharan African companies to mitigate the shortcomings in both rule and principle-based regulations. The Institute of directors in Southern Africa and the King Committee on Governance (2009)67 in order to capture the peculiarities of the South African business environment made the move from the conventional ‘comply or explain’ to an integrated regulatory (apply or explain) approach. The ‘apply or explain’ approach advocated for by the King III Report, acknowledges that it is not whether a company complies or not, but rather how the principles on corporate governance can be applied. Therefore, principles have dominated this approach with the acknowledgement that some principles have been legislated compelling compliance with the letter of the law, thus distancing the legislated principles from subjective interpretations. Noteworthy, the King III Report integrates elements of rule-based and principle-based approaches into the ‘apply or explain’ approach advocated for Sub-Saharan Africa. 65 Cave J, ‘Policy and regulatory requirement for future internet’ in Brown I (ed), Research handbook on governance of the internet, UK ed, Edward Elgar Publishing, 2013, 143-167. 66 Nakpodia F, Adegbite E, Amaeshi K and Owolabi A, ‘Neither principles nor rules: Making corporate governance work in Sub-Saharan Africa’ 151 (2) Journal of Business Ethics, 2018, 391-408. 67 The Institute of Directors in Southern Africa and King Committee on governance, King report on governance for South Africa, 2009. 16 Jacob K Gakeri (2013)68 critiques the guidelines set out by the Capital Markets Authority to have taken a ‘comply or explain’ approach, hence creating an escape route for directors as well as their companies. He argues that for Kenya to foster a responsive culture of corporate governance, the ‘comply or explain’ enforcement matrix should be dispensed with, and the training of directors should be made a priority. This study will seek to explore whether since the enactment of the Companies Act 2015 there are significant changes to the corporate governance environment juxtaposed to Gakeri’s article. 1.8.7 Knowledge Gap In determining the relevance and impact of corporate governance in various corporations, researchers have found themselves confining their studies to exploring one or all aspects of corporate governance. Globally, majority of the researchers have channeled their energies to using public and state-owned companies as their case study. Kenyan case studies are no exception. Despite family-owned companies in the retail sector forming sixty per cent of companies in Kenya, researchers have largely confined their studies on the impact of corporate governance to state-owned companies, financial institutions and listed companies. This phenomenon has left companies in the retail sector unexplored. For this reason, this study seeks to bridge the gap and address the question, whether the rising number of collapsing retail companies in Kenya is as a result of legal and regulatory compliance issues in the implementation and practice of the extant corporate governance regulatory framework. 1.9 RESEARCH METHODOLOGY In testing the hypothesis of the study, due to the nature of the study and factoring in the pandemic, the desk-view design was used to gather information. The study deployed a doctrinal approach that involved a qualitative analysis of the primary and secondary sources on corporate governance, and a critical analysis of the legal framework, case laws, policies and government reports on corporate governance. In carrying out the qualitative analysis of the case study, five collapsed companies in Kenya’s retail sector, that is Uchumi supermarket plc, Ukwala supermarket, Ebrahim supermarket, Nakumatt holdings ltd and Tuskys supermarket, were also examined. News reports on the collapsed retail companies as reported in the dailies and news broadcasting stations was employed to investigate why the case study retail companies collapsed. 68 Gakeri J, ‘Enhancing Kenya’s securities markets through corporate governance’ 3 (6) International Journal of Humanities and Social Science, 2013, 94-117. 17 In addition, the research process involved visiting the library to access relevant text books, case law, journals, statutes, newspapers and other relevant resource materials on the topic. The study made the most of extensive internet browsing made reference to relevant blogs and websites for information on the topic. Browsing the internet gave access to online journals and sentiments of various authors and commentators on corporate governance internationally and in Kenya. The links and dates on which the said blogs, websites and online journals were accessed have been clearly stated for purposes of proper referencing. 1.10 LIMITATIONS As earlier alluded, the 2020 pandemic posed a limitation to the study. With the restrictions put in place to mitigate the widespread of coronavirus, conducting in person interviews with both the owners and the management of the five study collapsed retail companies was a challenge. Another limitation to the study was that due to the structure of the retail companies and secrecy on company dealings, gathering information about the collapses was a challenge. It was difficult to get in touch with the owners and the management willing to divulge information on why the retail companies collapsed. In addition, due to advocate-client confidentiality getting more information about the collapsed retail companies especially on the court proceedings, was a challenge. To mitigate the limitations of the study, the use of the qualitative study approach as discussed in 1.9, was adequate to collect data on the collapses and the regulatory compliance issues facing retail companies. 1.11 CHAPTER BREAKDOWN This study features five chapters as discussed herein below: Chapter one: Introduction This chapter acquaints one with the study by giving a broad overview and structure of the study. It sets the discussion in motion by briefly introducing the study, identifying the problem, outlining the objectives and the questions aiding the study in achieving the said objectives, justifying the study, hypothesizing the study, outlining the theoretical and conceptual framework, reviewing corporate governance literature and by giving a breakdown of the chapters in the study. Chapter two: Kenya’s corporate governance history and legal framework 18 This chapter explores the intricate rich corporate governance history and legal framework in Kenya; attention paid to corporate governance in Kenya’s retail companies. The chapter further breaks down into three main parts: the first part defines corporate governance; the second part discusses Kenya’s corporate governance historical background whereas the third examines the extant corporate governance legal framework in Kenya. In addition, the chapter seeks to demonstrate corporate governance, its backing legal framework and its implementation with respect to retail companies in Kenya. Chapter three: Case study on why retail companies in Kenya are collapsing This chapter analyses five collapsed companies in the retail sector, that is Uchumi supermarket plc, Ukwala supermarket, Ebrahim supermarket, Nakumatt holdings ltd and Tuskys supermarket, to investigate what led to their collapse. The chapter further argues that despite the government’s interventions, retail companies are collapsing at a high rate. Chapter four: Ties that bind the factors leading to retail company collapses to corporate governance regulatory compliance issues This chapter by discussing the salient features of corporate governance and analysing the results of the case study, shall be able to establish the ties that bind the factors leading to retail company collapses to regulatory compliance issues as a challenge facing the implementation and practice of corporate governance by retail companies in Kenya. The chapter draws focus on the theories of corporate governance and the principles of corporate governance to establish the ties. Chapter five: Finding, Conclusions and Recommendations This chapter analyses the key findings drawn from the study and gives recommendations for reforms (if necessary). The chapter argues that to effectively address corporate failure as identified in chapters two, three and four of this study, the government should impose corporate governance regulatory framework compliance on retail companies via an integrated regulatory approach. 19 CHAPTER TWO: KENYA’S CORPORATE GOVERNANCE HISTORY AND LEGAL FRAMEWORK 2.1 INTRODUCTION This chapter explores the intricate rich corporate governance history and legal framework in Kenya. Attention is paid to corporate governance in Kenya’s retail companies. The chapter is broken down into three main parts: the first part defines corporate governance; the second part discusses Kenya’s corporate governance historical background whereas the third examines the extant corporate governance legal framework in Kenya. In addition, the chapter seeks to demonstrate corporate governance, its backing legal framework and its implementation to retail companies in Kenya. 2.2 WHAT IS CORPORATE GOVERNANCE? Governance is defined as “applying policies, proper implementation, and continuous monitoring. Typically done through or by an organization’s governing body.”69 For this study, governance shall be concerned with the processes, systems, customs, procedures and best practices, either implied or expressed, that ensure the smooth running of a company in accordance with the company’s founding laws and their implementation achieved, and the relationships between the company, management, shareholders and stakeholders determined or created by these rules and procedures. As discussed in the earlier chapter, the definition of corporate governance has been re-written by several scholars emphasising different aspects. Some scholars based their definition on one aspect of corporate governance whereas others centre their definition on some of the aspects, if not all. In consideration of the theories this study is based on, corporate governance for the purposes of this study shall be the manner in which a company’s power is exercised in stewardship of the company’s total portfolio of assets and resources, with intent to maintain and increase shareholder value and satisfy stakeholders in the context of its corporate mission.70 It shall be concerned with striking a balance between individual and communal goals, and between economic and social goals while fostering resources usage, power usage accountability and stewardship efficacy to align the company’s, individuals’ and society’s interests.71 In addition, corporate governance is about cultivating a conducive legal, economic 69 Black’s Law Dictionary, 11th ed. 70 Khan H, ‘A literature review of corporate governance’ 25 International Conference on E-business, Management and Economics IPEDR, 2011. 71 Farinha J, ‘Corporate Governance: A Survey of the Literature’ Universidade do Porto Economia, Discussion Paper Number 2003-06 — on 25 April 2020. 20 and institutional milieu that allows a company to thrive while being mindful of stakeholders, the environment and the society at large in advancing its shareholder value.72 2.3 HISTORICAL BACKGROUND OF CORPORATE GOVERNANCE IN KENYA Briefly discussed in the earlier chapter, corporate governance can trace its roots in the 1980s when stock market crashes occasioned by poor governance practices by companies were globally recorded.73 The concept of corporate governance has existed for centuries as witnessed by the evolution of balance, power and decision making between key players in a company’s management and ownership.7475 Despite the existence of the concept of corporate governance as evidenced over the centuries, it was formally actualized in the 1990s when the commonwealth government heads developed the International Corporate Network – the first globally accepted corporate governance institution- to promote and coordinate research and development in corporate governance. Later on, the commonwealth government heads established the Commonwealth Association for Corporate Governance (CACG); which developed the CACG guidelines. These guidelines were the base line for corporate governance principles in the Commonwealth. In 1999, the World Bank and the OECD held the Global Corporate Governance Forum, that birthed the OECD principles of corporate governance. 2.3.1 Postcolonial Period (1964-1999) The history of Kenya includes several decades of colonization by the English settlers, characterized by continual conflict between the settlers and indigenous Kenyans. Unsurprisingly, after Kenya gained her independence in 1963 and consequently becoming a republic in 1964, the corporate landscape reflects that of her colonizers due to her obsolescent nature of being akin to transplanting a mature English oak in the virgin Kenyan soils without being mindful of the stark ecological differences. That notwithstanding, Kenya’s evolution of corporate governance was fostered during the institutionalization of government corporations 72 Private Sector Initiative for Corporate Governance, Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance, Private Sector Corporate Governance Trust, Nairobi, 2002, 1. 73 Solomon J and Solomon A, Corporate governance and accountability, 1st ed, Wiley, New York, 2004. 74 Price N, ‘What is the history of corporate governance and how has it changed?’ Diligent Insights, 3 October 2018 — on 19 September 2020. 75 Price N, ‘What is the history of corporate governance and how has it changed?’ Diligent Insights, 3 October 2018 — on 19 September 2020. 21 that led to the discovery of accountability deficiency trickling down from public sector to private sector companies.76 In the late 1990s when the globalization of corporate governance was taking place, Kenya between the months of November 1998 and March 1999 held several consultative corporate sector seminars with the aim of resolving and establishing a corporate governance initiative; the Private Sector Initiative for Corporate Governance.77 The initiative’s mandate was to formulate and develop a best corporate governance practices code and to explore ways of establishing a corporate governance national body that will coordinate developments in corporate governance in the country. 2.3.2 Postcolonial Period (1999-2002) In 1999, the Private Sector Corporate Governance Trust (PSCGT), which was renamed to the Centre for Corporate Governance in 2002,78 was established and mandated to foster the highest standards of corporate governance and excellence in all types of companies through training, education, research, monitoring, evaluation and advocacy. In 2002, the Private Sector Initiative for Corporate Governance’s code of best practices for corporate governance79 was institutionalized by the promulgation of the Guidelines on Principles of Corporate Governance for Public Listed Companies80 by the Capital Markets Authority. Evidently, the Private Sector Initiative for Corporate Governance was successful in exercising its mandate as seen by the establishment of a corporate governance national body, the PSCGT and the development and adoption of a national code of best practices for corporate governance that guided corporate governance developments in the country. 81 76 Ruparelia R and Njuguna A, ‘The Evolution of Corporate Governance and Consequent Domestication in Kenya’ 7 (5) International Journal of Business and Social Science, 2016, 153-163. 77 Ruparelia R and Njuguna A, ‘The Evolution of Corporate Governance and Consequent Domestication in Kenya’ 7 (5) International Journal of Business and Social Science, 2016, 153-163. 78 ‘Centre for Corporate Governance -Our history’— on 25 July 2020. 79 Private Sector Initiative for Corporate Governance, Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance, Private Sector Corporate Governance Trust, Nairobi, 2002, 11-24. 80 Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya (Gazette Notice No. 3362 of 2002). 81 Ruparelia R and Njuguna A, ‘The Evolution of Corporate Governance and Consequent Domestication in Kenya’ 7 (5) International Journal of Business and Social Science, 2016, 153-163. 22 2.3.3 Postcolonial Period (2002-2020) The Centre for Corporate Governance has played a key role in the establishment of the Pan African Consultative Forum for Corporate Governance, Kenya Shareholders Association, Institute of Directors and the Consultative Forum for Chairmen of State-owned Corporations in Kenya, all in a bid to foster the highest standards of corporate governance in all types of companies in the country.82 As at July 2018, the Centre had trained over 14,308 public leaders, political leaders and senior managers from all types of organizations.83. Since 1964, the evolution of corporate governance in the country has been cemented by the promulgation of the 2010 Constitution,84 the enactment of the 2015 Companies Act,85 the establishment of the Capital Markets Authority by the Capital Markets Act86 and by the codification of best practices of corporate governance by the Mwongozo87 in 2015. 2.4 CORPORATE GOVERNANCE LEGAL FRAMEWORK IN KENYA Corporate governance envisions corporate transparency, accountability and fairness, and its codification is of necessity as it unifies the several laws regulating corporate governance. The corporate governance legal landscape in Kenya encompasses the local, regional and international legal sphere. 2.4.1 Domestic Legal Framework As mentioned in passing in point 2.3.3, the domestic legal framework seeking to foster corporate governance in the country is made up of the following: - 2.4.1.1 The Constitution The Constitution of Kenya, 2010 is the supreme law of the country88 and it embodies the sovereign and inalienable right of the people to determine the form of governance of the country. It contains provisions that promote corporate governance. The Constitution introduces us to good corporate governance practices under article 10 that provides for the national values 82 ‘Centre for Corporate Governance -Our history’— on 25 July 2020. 83 ‘Centre for Corporate Governance -Our history’— on 25 July 2020. 84 Constitution of Kenya (2010). 85 Companies Act (Act No.17 of 2015). 86 Section 5, Capital Markets Act (CAP. 485A). 87 MWONGOZO: The Code of Governance for State Corporations’ (Public Service Commission and State Corporations Advisory Committee 2015). 88 Article 2, Constitution of Kenya (2010). 23 and principles of governance that are binding on state-owned corporations, public officers and private entities as well; to be specific: “10. (2) The national values and principles of governance include – c) good governance, integrity, transparency and accountability; and d) sustainable development.”89 In interpreting this provision, it broadly implies that all personnel (including companies) need to adhere to good corporate governance and specifically, it implies that companies within the country ought to be managed in a responsible and accountable manner. The bill of rights under the Constitution also promotes corporate governance specifically the principles of accountability and disclosure through the right to access of information; “35. (1) Every citizen has the right to access to - b) information held by another person and required for the exercise or protection of any right or fundamental freedom.”90 Loosely interpreting the provision, shareholders as part of the general public are granted the right to crucial information about the company. The same is further stipulated in the Companies Act as shall be discussed herein. Notably, the provisions discussed herein above are broad, as they impose the principles of good corporate governance onto all. One can argue that the provisions do not explicitly apply to retail companies. However, that is not the case. The Constitution being the supreme law of the country, it is of the people, by the people and for the people. Therefore, dictating that anybody within the country and any company registered in the country has to comply with it. 2.4.1.2 The Companies Act The substantive law in the country that regulates companies is the Companies Act, 2015. It is not to be perceived that Kenya only began to regulate companies in 2015. To the contrary, companies were regulated by the Companies Act (Cap 486) prior to the Act. The predecessor was enacted in 1978 and revised in 2009. Cap 486 imposed certain statutory limitations that made it a challenge for companies to establish goodwill and practice. These limitations were but not limited to the age of a director, the number of directors a company should have, the obligation to have a registered company secretary, and restricting a company’s business to its 89 Article 10 (2) (c) - (d), Constitution of Kenya (2010). 90 Article 35 (1) (b), Constitution of Kenya (2010). 24 formative objectives. To mitigate these shortcoming Cap 486 posed, the 2015 Act sets out to boost ease of doing business by taking into consideration developments in technology and procedures. Despite the Act being critiqued for being voluminous due to its comprehensive provisions and being heavily drawn from the UK Companies Act 2006, it recognises and codifies now generally accepted principles of corporate governance. The Act ensures that a company is managed properly by providing various guidelines. The amendments introduced in the Act, codified the common law duties of directors; that is directors fiduciary duties. The duties to act within their powers, to act in the best interest of the company, to exercise reasonable skill, to avoid conflict of interest and to not accept gifts from third parties,91 have made it possible to hold directors accountable.92 The disqualification of directors for fraud, breach of duty, upon findings after an investigation or if they are convicted of an offence93 has cemented the principle of accountability as directors are held liable for their actions. The principle of transparency and disclosure is fostered under the Act by requiring directors to file financial reports with the Registrar of Companies.94 The financial reports should reflect the true and fair financial status of a company in terms of assets, liabilities and loss or profits. Therefore, proper accounting is of essence. Proper accounting encompasses giving detailed account for transactions and complying with prescribed financial accounting guidelines.95 The financial report is made up of: - • A company’s individual financial statement consisting of “a balance sheet as at the last day of the financial year, a profit and loss account, a cashflow statement and change in equity statement;”96 and • An auditor’s report consisting of the audited accounts report, risk assessment report and procurement report. Once the financial reports are filed at the Companies’ Registry; they are public documents and can be accessed publicly. This enables companies to portray a transparent image. 91 Sections 142–147, Companies Act (Act No.17 of 2015). 92 Section 148, Companies Act (Act No.17 of 2015). 93 Sections 214–218, Companies Act (Act No.17 of 2015). 94 Sections 635–636, Companies Act (Act No.17 of 2015). 95 Section 628, Companies Act (Act No.17 of 2015). 96 Section 638, Companies Act (Act No.17 of 2015). 25 In addition to promoting transparency and disclosure, shareholders are granted the right to inspect the company records.97 The principle of fairness features in the Act by granting shareholders the right to vote and participate in company meetings, the right to share in the profits of the company and the right to request for information. In addition to the financial reports, directors are required to file directors’ reports. The directors’ reports are two: the directors’ report98 and the directors’ remuneration report.99 The directors’ report divulges information on the board structure for the financial year100 and the directors’ business review of the company.101 The directors are to disclose on the company’s impact on stakeholders, and the extant and potential risks facing the company. On the other hand, the contents of the directors’ remuneration report as prescribed by the Companies (General) (Amendment) Regulations 2017102 are disclosure on information not subject to audit and disclosure on information subject to audit. The information not subject to audit that needs to be disclosed in a directors’ remuneration report include: - • A statement of voting on directors’ remuneration comprising of the resolution to approve the remuneration report and the resolution to approve the directors’ remuneration policy, all reflecting the total number of votes withheld, cast for and against the reports; and • A policy statement comprising of a summary of the individual directors’ performance conditions for them to be entitled to share options or a long-term investment scheme, and details on the duration of directors’ contracts, notice periods and termination payments under the contract of service. At first glance, the information not subject to audit may seem unnecessary. On the contrary, the information seeks to inform the shareholders to make informed decisions with regards to remunerating the directors. The information subject to audit to be disclosed in a directors’ remuneration report includes: - 97 Section 96, Companies Act (Act No.17 of 2015). 98 Section 653, Companies Act (Act No.17 of 2015). 99 Section 659, Companies Act (Act No.17 of 2015). 100 Section 654, Companies Act (Act No.17 of 2015). 101 Section 655, Companies Act (Act No.17 of 2015). 102 Companies (General) (Amendment) Regulations (L.N. 19 of 2017). 26 • Directors’ benefits and compensation comprising of disclosure on total amount salary, bonuses, taxable expense allowances and compensation for loss of office paid to the director, and any benefits other than in cash received by the director; • Information on directors’ aggregated share options comprising of disclosure on the number of shares subject to share option at the start and end of the financial year, the number of shares awarded, the number of shares exercised, the number of expired shares and any variation to the rights; • Information on schemes of interests awarded comprising of details on interests in assets receivable in respect of the qualifying services of a director, awarded to the director in the financial year as well as those due at the end of the financial year; • Information on pension comprising of details on the pension arrangement and changes thereof if any, and the management of assets and financial affairs of the pension scheme; • Information on past directors’ compensation disclosing any awards made to a director who at the time of making the award was not a director; and • Information on aggregated amount paid to third parties for availing services of a director. Prior 2015, the directors would give an aggregated amount of their remuneration or worse not divulge on their remuneration. To further curb this, the regulations mandate each director to prepare an individual directors’ remuneration report to enhance disclosure and transparency. came into effect to introduce disclosure requirements for the directors’ remuneration report. Notably, with the exception of listed companies, not all companies are required to file a directors’ remuneration report. However, all companies are required to file a financial report and a directors’ report. 2.4.1.3 Capital Markets Act The Capital Markets Act establishes the Capital Markets Authority (CMA).103 Principally, the CMA is meant to facilitate and maintain a conducive securities market that protects investors’ interests and to prescribe rules, policies and guidelines on corporate governance for listed companies.104 In 2002, CMA introduced the Guidelines on Corporate Governance Practices 103 Section 5, Capital Markets Act (CAP. 485A). 104 Section 11, Capital Markets Act (CAP. 485A). 27 by Public Listed Companies in Kenya105 to enrich good governance in corporate performance, maximizing shareholders value and in protecting investors’ rights. 2.4.1.4 The Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 The Code of Corporate Governance Practices for Issuers of Securities to the Public106 succeeds the Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya.107 The code was developed to respond to Kenya’s changing business environment and the need to align the extant regulatory framework to the globally accepted best corporate governance practices. The code’s compliance requirements move away from the ‘comply or explain’ approach to the ‘apply or explain’ approach which is an integrated regulatory approach that embraces both rule-based and principle-based compliance approaches. The move makes decision-making by the board of directors flexible and in the event the decision made does not meet the threshold standards of governance prescribed in the code, they are to explain as to why they failed to meet it. The code further spells out corporate governance principles for boards of directors by giving emphasis to the necessity of good corporate governance as it enhances accountability and performance of directors, and promotes efficacy of limited resources usage. In addition, the code outlines proficient leadership, corporate compliance, good communication with stakeholders, accountability to shareholders, proficient internal control procedures and adoption of technology as the primary obligations of the board of directors. These minimum standards companies must implement as made mandatory by the code have also been incorporated in the Capital Markets (Securities) (Public Offers, Listing and Disclosures) (Amendment) Regulations, 2016.108 2.4.1.5 Nairobi Securities Exchange (Market Participants) Rules, 2014 The NSE, authorised by the CMA, offers a securities trading platform in Kenya and oversees trading companies.109 The NSE introduced the Nairobi Securities Exchange (Market Participants) Rules110 with the aim of promoting transparency and fairness within the capital 105 Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya (Gazette Notice No. 3362 of 2002). 106 The Code of Corporate Governance Practices for Issuers of Securities to the Public (Gazette Notice No. 1420 of 2015). 107 Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya (Gazette Notice No. 3362 of 2002). 108 Capital Markets (Securities) (Public Offers, Listing and Disclosures) (Amendment) Regulations (L.N. 36 of 2016). 109 Capital Markets (Demutualization of the Nairobi Securities Exchange Limited) Regulations (L.N. 87 of 2012). 110 Nairobi Securities Exchange (Market Participants) Rules (2014). 28 markets. Noteworthy, the rules are meant to serve as a complementary to the CMA Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya. The NSE requires listed companies to enforce the Nairobi Securities Exchange (Market Participants) Rules onto their employees in order to encourage fair market practices among market participants. Fair market practices include but are not limited to disclosure of information to shareholders and avoiding conflict of interest. These practices in turn nurture the corporate governance principles of fairness and integrity. The fair market practices are further prescribed as a general code of conduct for market participants by the rules. In addition, the Nairobi Securities Exchange (Market Participants) Rules are self-regulatory. They obligate the board of directors of listed company to appoint a disciplinary committee to enforce the rules. This creates a two-tier system of regulation: enforcement of the rules on the employees of the listed company by the board of directors and enforcement of the rules on the board of directors by the NSE. 2.4.1.6 Mwongozo: The Code of Governance for State Corporations The Presidential Taskforce on Parastatal Reforms was established to address the accountability deficiency discovered during the institutionalization of government corporations. In March 2015, the taskforce in conjunction with the State Corporations Advisory Committee and the Institute of Certified Public Secretaries of Kenya in consultation with the World Bank, succeeded in its mandate and presented the Mwongozo: The Code of Governance for State Corporations.111112 As the name of the code suggests, the code aims to ensure that corporate governance excellence is paramount in state-owned companies. The code draws its inspiration from the Constitution and the OECD guidelines113 among other corporate governance legal frameworks,114 to give emphasis to the effectiveness of boards of directors, transparent disclosure, accountability, risk management, proficient internal controls and ethical leadership. Mwongozo fosters effective engagement with stakeholders by providing a platform for tackling shareholder rights and 111 State Corporations Advisory Committee, ‘Mwongozo’ State Corporations Advisory Committee, 16 February 2015 — on 19 April 2020. 112 MWONGOZO: The Code of Governance for State Corporations (Public Service Commission and State Corporations Advisory Committee 2015). 113 OECD, OECD guidelines on corporate governance of state-owned enterprises, OECD Publishing, 2015. 114 The Mwongozo also draws its inspirations from the State Corporations Act, CAP 446, the Public Officers and Ethics Act (2003), King III Report on Corporate Governance for South Africa (King III) (2009), the Malaysian Code of Corporate Governance (2012) and the State Corporations Advisory Committee Guidelines (2004). 29 obligations. From the foregoing, the code’s aim is to enhance transparency and accountability in public service in a ‘comply or explain’ approach. 2.4.1.7 Retail Trade Code of Practice to guide Prompt Payment in the Retail Sector Given the wake of the recent collapses of retail companies, the retailers, suppliers, manufactures and the government through the Ministry of Industrialization, Trade and Enterprises Development have made efforts to foster good corporate governance. This is seen through the adoption of the Retail Trade Code of Practice to guide Prompt Payment in the Retail Sector in 2019. The code, signed by the Kenya Association of Manufacturers, Association of Kenya Suppliers and the Retail Trade Association of Kenya, is meant to encourage self-regulation and harmonize retailer/supplier relationship