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Why corporate reforms falter: some insights from Kenya

Socioeconomic development in African countries, along with other developing countries, is held back by many constraints. These include an insufficiently skilled workforce, poor infrastructure, and inadequate capital to finance public goods and services. This is also true for some African countries with abundant natural resources.

For decades, an array of structural reforms have been put forward to steer developing countries towards growth. Some have been economic, others political, or focused on the public sector. Most are concocted in western countries and midwifed by powerful western agencies, such as the World Bank and International Monetary Fund.

Yet they have not led to the intended results. One reason is that recipient countries have traditionally been excluded from designing the reforms. This creates mistrust between those who want them and those who are forced to accept them.

Another reason that’s been suggested is that the western roots of reforms make them incompatible with the social contexts of African countries. Tying reforms to financial aid is a third reason. Bureaucrats in poor countries often view proposed reforms as nothing more than a means to international liquidity.

Our recent research sought to understand why western-led corporate sector regulations don’t always have the intended effect in Kenya. Our study found that even the most well-crafted and well-meaning reforms are doomed to fail if they lack compatibility with host country contexts.

For instance, adopting state-of-the-art global reporting standards or certifications doesn’t prevent accounting malpractices. This is because accountants and auditors can be swayed by threats of violence or by bribery.

Our study

Our study was motivated by the poor record of structural reforms in African and other developing countries. It was also informed by reports of accounting fraud and weak corporate governance practices in Kenya. We examined why reforms fail to live up to their promise.

We focused on one part of the broader economic reforms: the corporate governance model and international financial reporting standards inspired by Anglo-American business. We hoped to contribute to research on how these standards and governance systems work in developing countries.

We interviewed people involved in implementing corporate sector regulations. We also looked at archival evidence like corporate records, media reports, and official and policy publications. Using Kenya as a testing ground, we were keen to see whether western-originating reforms could thrive and deliver the intended outcomes.

This is a departure from previous studies which have largely concentrated on reform negotiation processes. Others have focused on interactions between representatives of western institutions and developing countries’ bureaucrats.

Our findings

Our analysis relied on the idea of neopatrimonialism: a way of life where personal relationships dominate interactions. To sustain relationships, people often exchange money, or other goods and services of value. This selective special treatment can foster corruption. It’s informal and blurs the lines between private and public resources.

This is how we looked at the interactions between traditional African social institutions and relatively recent corporate sector regulations in Kenya.

In western corporate governance, non-executive directors are not involved in the day-to-day management of a company. They are supposed to provide independent oversight of the board’s functions and constructive criticism on the behaviour of executive directors and senior managers.

We observed several interesting trends in the Kenyan context. Boards of directors and professionals such as accountants and auditors consistently deviated from clear provisions contained in the corporate sector regulations. For instance, non-executive directors in public companies routinely failed to monitor executive management effectively.

This is because their appointments were based on patronage relations with management. They were less likely to intervene where criticism of the management was warranted.

Evidence from interviews and archival records reinforced this point. We found that the number of accountancy professionals involved in corrupt practices and fraudulent financial reporting appeared to be high in Kenya.

This finding was not surprising. Such relations are common in many developing countries.

We also found the regulatory infrastructure to be weak, primarily due to inadequate funding. Poor funding deterred highly competent staff and starved institutions of enabling technology. The political appointment of top management of regulatory bodies made it hard for them to effectively oversee firms owned or controlled by the political class.

Finally, having a lot of regulatory requirements creates confusion and is counterproductive.

Way forward

Corporate governance guidelines envisage the appointment of non-executive directors. But that does not guarantee board independence if the directors are members of influential families, politicians, current or former senior civil servants, or other social elites. Such individuals also dominate business activities and may have patronage relations with one another.

Eliminating these networks is nearly impossible. Donors and policymakers should therefore begin by looking inward for more fitting solutions. They should do this before transplanting detailed external reforms which risk serving at best as facades of good governance.

For instance, efforts to curb misconduct of company directors should begin by empowering relevant regulatory bodies. This can be done through better resource allocation and staffing. This is also immensely important in curbing the behaviour of other influential market players.

To improve financial reporting and corporate accountability, authorities should improve the quality of training offered to accountants and auditors. It’s also vital to address possible threats to professionals or whistle-blowers.

Finally, reforms are a cog within a big wheel. They should go with appropriate improvements to the enabling infrastructure.

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