How poor leadership hurts business

NAIROBI: Over the past few weeks, I have keenly followed the conversation around certain institutions that have been in the public eye, and for all the wrong reasons. Two things come to mind: One, it is becoming increasingly obvious that there are certain governance failures that are too big to ignore and that sadly, organisations cannot be trusted to self-monitor from the inside; second, and this is more distressing, if left unchecked, these institutions run the risk of complete obliteration.

Lest I run the risk of appearing to be casting governance as simplistic, I must state it is neither easy nor straightforward. But for all the effort it takes to implement policies and frameworks, not just on paper but as a practice and culture, the rewards are building a sustainable organisation that transcends time. In fact, the specific aspects of good governance, those revolving around the functions of the board in relation to risk management, planning and execution of strategy require constant evaluation and innovation.

Although we tend to assume that innovation is a process that is predominantly outward-facing, research shows that continuous internal innovation in the way we run businesses and institutions reap significant rewards, in some cases even more than client-facing activities. I recall reading a case study of a large firm that was based in Asia and how it collapsed. Employing 50,000 employees, listed on the stock exchange and consistently reporting healthy profits, its downfall sent shockwaves through the nation. It brought light to the fact that in many cases, financial improprieties can persist in the system for years before an incident triggers the collapse of deceit and fabrications.

In this particular case, it was found that the board had consistently and systematically inflated profits in order to project a healthier picture than how the organisation was really performing. The directors were also found culpable of concealing substantial debts. The founder, when confessing to how the company accounts had been manipulated, disclosed that if the firm had reported its true poor performance, there would have been a takeover. Furthermore, certain parties had made significant amounts of money in the scam through insider trading based on the fictitious numbers.

In yet another case study that looked into how a major supermarket chain grew in a territory that was rife with corruption, the management went against the organisation’s values. In a bid to fulfil the targets set for aggressive growth, they used all means possible including bribing officials to grant them operating and zoning permits, allowing them to open more stores. While the organisation’s profitability got significantly better, and the top management were pleased by the progress, the organization’s reputation was at risk when news of the practices broke.

We say that hindsight is 20-20. When evaluating scandals in the public domain, it is easy to be knowledgeable about an event after it has happened. Actions or inactions that may not have been so obvious at the outset suddenly click. And the question always comes down to the individuals entrusted with stewardship of the institution, whether they exercised due care and diligence in discharging their duties. In many cases, institutions appoint individuals as figureheads to take a seat on the board without necessarily having the right competencies to execute on their roles.

Sadly, in Kenya, the regulations against institutions that lose investor and taxpayers’ money are sketchy at best, with very low focus on the remedial steps to be taken to ensure no repeat of misdemeanours. In Asia for example, the founder and nine other directors who served the company in various capacities were found guilty in a commercial court of law and sentenced accordingly.

Having weak governance in institutions does not just hurt the direct parties that interact with the firms such as employees. The effects of, say bankruptcy, are far-reaching, adversely affecting the whole ecosystem of suppliers and clients, lenders and investors and ultimately, taxpayers. Poor governance also sets a bad precedent for other organisations in the same industry and creates a wariness that is hard to get rid of.

Even worse, the collapse of integrity and transparency in institutions sends a clear warning to potential investors to either keep away from certain jurisdictions or makes it more expensive for them if they choose to conduct thorough due diligence. Ultimately, these costs add up and when faced with two regions with similar potential, investors will choose the less risky option in order to reduce their exposure.

Public confidence is diminished, resulting in even more dire consequences, a reduced participation in trading with these listed companies creating a vicious cycle and discouraging prospective countries from aspiring to list on the stock exchange.

Whichever way we look at it, there are different circumstances that lead to misconduct whether from a board or managerial standpoint. The only way to ensure that these are kept in check is by strengthening the regulations the institutions are operating under and ensuring the industry watchdogs are objectively enforcing laws.