A.) Sound appointments and balanced board composition – An effective organization has a system (comprising recruitment policies, structures, principles, framework, succession plans, etc.) that ensures that it has the right caliber and number of leaders (directors and managers) to deliver the effective, accountable, and ethical leadership. Organizations should ensure that the appointment and succession planning framework delivers a good balance of skills, experience, expertise (both industry-specific and technical/functional), and diversity (e.g., gender, backgrounds, etc.) within the governing body to improve effectiveness.

In terms of sound appointment, the MD and board chairman is a seasoned IT professional and banker respectively, while the COO and board member is also an experienced banker. The non-executive director (NED) is an experienced accountant and a lawyer who brings to the board expertise in accounting, finance and law. Collectively the three directors have a good balanced of skills, experience and expertise to lead the company to success. However, the board of SLC is arguably not balanced in its composition because there is only one NED on a five- member board. The NED potentially cannot perform its functions well, including demanding effective accountability from the executive directors because of its micro-minority.

ii. Professional independence and checks – Organizations should ensure that there is reasonable and sufficient level of independence of the governing body from the management team. Organizations in Kenya should ensure that the governing body has majority of its members being independent of the management team. Organizations should also ensure that they have sufficient checks and balances to minimize unbridled power and potential power abuses. Checks and balances are governance mechanisms and arrangements to prevent any individual or small group of individuals within the governing body from exerting too much power.

Although SLC is a privately owned company it is important that it complies with the best practices in corporate governance to ensure that it survives in the future. The current board of directors has no director who is independent of the management which violates independence requirement. Again, the dominance of the Jamesons family on the board and management clearly compromises the checks and balances required in corporate governance. Therefore, by the nature of the current board of SLC, it fails the fundamental corporate governance principle of professional independence and checks.

iii. Commensurate remuneration – Organizations should have remuneration schemes that are competitive to attract and retain good talent, as well as reward the efforts of employees, managers, and governing members towards organizational success. The remuneration scheme should promote long-term performance and be linked to the achievement of the organization’s shared purpose but should not incentivize excessive risk-taking. The executive members of the governing body should have performance-based remuneration while the nonexecutive members should earn a flat fee commensurate with the time commitments of the role.

One of the reasons assigned for high labor turnover among non-core factory workers in SLC is poor remuneration. It is said that the workers work long hours, yet they are not remunerated adequately, hence high labor turnover. On that score, it can be argued that SLC is breaching commensurate remuneration principle of corporate governance. However, the company appears to be doing well with the core staff remuneration as it has been able to retain them for an average period of 5 years.

Again, Mr. Jameson believes that corporate governance can be financially burdensome due to the allowances paid to directors and the overall cost of board operations. This may signal the fact that the shareholders may be reluctant in offering competitive remuneration to attract and retain talented non-family senior management and board members. This may affect quality of management and directors that the company may attract to the board. This may explain why the board has not seen any changes since the inception of the company. This may create familiarity and the board may become ineffective in performing its oversight responsibilities regarding the management.

iv. Periodic evaluations and reviews – An organization should periodically review the performance of its governing body as a whole and the individual members serving on it. The review process should help the governing body assess the contribution of the members to the work of the governing body and to the organization. The review and evaluation process can provide an opportunity for the governing body to assess its training needs, design its recruitment strategy, and provide accountability for individual members of the governing body.

It is said that the performance and contributions of board members have not been formally reviewed to date. This implies that the governance requirement for periodic evaluation and reviews of the performance of the board has not been complied with by SLC. This is another clear violation of a fundamental principle of corporate governance. SLC’s board is in urgent need of evaluation and review to assess its training needs, design its recruitment strategy, and provide accountability for individual members of the governing body.

v. Operating sustainably and humanely – Organizations should conduct their operations in a sustainable manner that reduces inefficiencies and wastages, and where practical, should adopt circular economy practices that encourage a culture of reuse and recycling. Organizations should strive to demonstrate environmental responsibility in all their activities, processes, and operations. Organizations have a responsibility to ensure that their activities do not cause irreparable harm to the natural environment and living things. Companies should safeguard respect for human rights in all their activities, operations, processes, and initiatives.

Undoubtedly, SLC has been operating in environmentally friendly manner by the introduction of several sustainability practices. The company has invested in state-of-the-art machines which are designed to minimize energy consumption and reduce rework caused by errors. Again, SLC sources engineered wood products such as MDF, particle boards, laminates, and plywood from suppliers certified by global sustainability standards. This reduces reliance on illegally logged local timber and ensures that products come from sustainably managed forests. Further the company plans to replace its fleet of four petrol-powered office vehicles with electric alternatives, contributing to reduced carbon emissions and promoting cleaner energy use. The company has installed a smart power management system across its factory and office facilities, automatically shutting off electrical power when areas are not in use, thereby reducing energy consumption and operational costs. This is ample evidence of SLC’s operating in an environmentally friendly manner which is contributing to environmental sustainability.

B)

Key corporate governance issues. Corporate governance codes around the world

emphasize six core issues that determine the quality of governance within an organization. These issues serve as benchmarks for evaluating whether a company is well or poorly governed.

 The role and responsibilities of the board of directors. The board of directors should have a clear understanding of its responsibilities, and it should fulfil these responsibilities and provide suitable leadership to the company. Governance is therefore concerned with establishing what the responsibilities of the board should be and making sure that these are carried out properly. It is doubtful whether SLC’s current board as constituted understands its responsibilities and whether it can perform the same. The management dominates the board which does not meet regularly. The responsibilities of the board are performed at board meetings, including review of management performance. Since the MD is the board chairman and the board meetings are irregular, this may point to the board not performing its responsibilities effectively.

 The composition and balance of the board of directors. A board of directors

collectively, and individual directors, should act with integrity, and bring independence of thought and judgment to their role. The board should not be dominated by a powerful chief executive and/or chairman. It is therefore important that the board should have a suitable balance and consist of individuals with a range of backgrounds and experience. The current composition of the SLC’s board is heavily dominated by Executive Directors (EDs), resulting in an imbalance that undermines effective governance and oversight of management. With Mr. Jameson, the MD, serving as the board chairman with three other directors being close family members, this clearly makes the board not balanced with respect to the number of EDs and Non-Executive Directors (NEDs).

 Financial reporting, narrative reporting and auditing. The board should be

properly accountable to its shareholders and should be open and transparent with investors generally. To make a board properly accountable, high standards of financial reporting (and narrative reporting) and external auditing must be upheld. The major ‘scandals’ of corporate governance in the past have been characterized by misleading financial information in the company’s accounts.

Since the shareholders are dominant on the board of SLC, it is expected that the board will be accountable to the shareholders. However, SLC, being a closely held family business, there is a risk that the board may not be open or transparent with other investors or stakeholders.

 Directors’ remuneration. Directors work for a reward. To encourage them

commitment to achieving the objectives of their company, they should be given suitable incentives. Linking remuneration to performance is considered essential for successful corporate governance. However, linking directors’ pay to performance is complex, and remuneration schemes for directors have not been particularly successful. Directors’ pay is an aspect of corporate governance where companies are frequently criticized.

Although directors’ remuneration was not explicitly disclosed, the directors may not be paid suitable compensation because of Mr. Jameson’s belief that allowances paid to directors are financially burdensome. This may also explain why the company’s board has not seen any changes since its inception. The only NED is a family friend of Jamesons and may not be paid suitable allowances to match the experience and skills possessed by the NED.

 Risk management and internal control. The directors should ensure that them

company operates within acceptable levels of risk and should ensure through a system of internal control that the resources of the company are properly used, and its assets are protected.

One major risk which the management has addressed is credit risk. The change in credit policy to deal with credit risk following significant bad debts incurred by the company.

 Shareholders’ rights. Shareholders’ rights vary between countries. These rights

might be weak or might not be exercised fully. Another aspect of corporate governance is encouraging the involvement of shareholders in the companies in which they invest, through more dialogue with the directors and through greater use of shareholder powers – such as voting powers at general meetings of the company.

Shareholders’ rights is not a major governance issue in SLC because shareholders are directors as well. Hence, shareholders’ rights would be respected and upheld by the directors.

 Disclosure. Keeping shareholders and other stakeholders informed about the

company through disclosures that go beyond the publication of audited financial statements.

Disclosure regarding shareholders of SLC is not an issue because the shareholders are actively involved in the management of the company. The shareholders have all information about the company by virtue of their management positions and board membership. The board must ensure that company makes adequate disclosure to other stakeholders including lenders or providers of debt capital.