Governance audits can mitigate corporate risks

The modern society has been experiencing transformations in the socio-economic, political, ecological and technological spheres.

This has been brought about by the need to address growing needs of the populace. The transformations have brought along with them myriads of challenges that threaten the achievement of the desired goals in institutions.

A number of corporate collapses and corrupt practices arising from the agency problem as well as the adoption of weak governance practices have been reported globally.

Further, erosion of shareholder value, loss of jobs, degradation of corporate brands, closure of businesses, environmental degradation are common occurrences reported by the media.  Others are sale of substandard products, tax evasion and misappropriation or misallocation of tax payers’ funds.

That notwithstanding, there has been continued clamour for good governance. Shareholders, citizens and the global community want more accountability from persons entrusted to steer institutions and nations. Investors are aware that for businesses to be sustainable and for them to achieve high returns on investment, good governance is paramount.

Emphatically, good governance is the precursor to improved shareholder value, strong brand recognition, reduced inefficiencies and corporate scandals, increased transparency and accountability, improved investor confidence and credit rating, increased employee and customer loyalty, efficient and sustainable institutions and a happy populace.

Quality of life

With sustained good governance in the public sector, the citizenry is assured of improved and efficient public goods and services that go a long way in uplifting their quality of life thus the need for continuous review of the governance systems and processes.

This is meant to give assurance that institutions are achieving their mandates as set out in their constitutive documents, and that agents are working for the best interest of the principals. Evidently, the Government has been advocating for good governance in the pursuit of its developmental agenda -  the Big Four, and the provision of services to its citizenry despite governance challenges that it has been working tirelessly to contain.

Of notable importance is the issuance of two governance codes.

Mwongozo, the code of governance for State corporations and the code of corporate governance practices for issuers of securities to the public which were both issued in 2015 are key governance frameworks in Kenya which if fully implemented would bring a positive transformation in the modus operandi of institutions.

Overarching principle

The two codes provide governance principles aimed at building strong and accountable institutions. The overarching principle in both codes that give assurance on the adequacy of the governance principles is the governance audit.

A governance audit is an independent assessment of an institution with a view of expressing opinion on the adequacy and effectiveness of organisation’s systems, policies, processes and practices.

The audits are effective mechanisms to check compliance with the governing legislation, regulations and codes of best practices. The audits, carried out on an annual basis, help in detecting areas of non-compliance and facilitates in taking prompt remedial measures.

The governance parameters to be audited include ethical leadership and corporate citizenship; transparency and disclosure; accountability, risk management and internal control and compliance with laws and regulations.

Others are stakeholder relationship, sustainability and performance management, consistent shareholder and stakeholder value enhancement, and corporate social responsibility and investment. 

There has been deliberate attempt by a number of public and private institutions in Kenya to institutionalise governance.

In 2010, the Institute of Certified Secretaries (ICS) inaugurated an annual award of excellence in governance titled ‘Champions of Governance Award’ which is given to those institutions and individuals that exhibit the highest standards of practice of good governance in line with its vision and mission.

The award aims at recognising the practice and application of good governance in both public and private sector entities thus encouraging institutions and individuals to focus on enhancement of good governance.

Institutions and individuals are encouraged to enter for this award competition. Further, a number of institutions have commenced undertaking governance audits. The audits are carried out by trained governance auditors accredited by the ICS.

Ideally, an effective governance audit results in the identification of operational gaps which if promptly addressed would mitigate the governance risks. It is incumbent upon every institution to conduct governance audits.

-The author is an accredited governance auditor and a member of the Institute of Certified Secretaries.