WHY SACCOS SHOULD EMBRACE GOOD GOVERNANCE

Business meeting in The New York City Office
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By Dr. Kellen Kiambati PhD. HRM(K) CBPO(A)

Today more than ever before, the operating environment has become very complex due to increasing dynamism and complexity as well as risks. The complexity of the operating environment, combined with the current unstable economic, social and political climate, places heightened demands on the management and boards of directors in savings and credit cooperative societies (saccos). Corporate governance refers to all the processes of governing, whether undertaken by a government, market or network, whether over a family, formal or informal organization or territory and whether through laws, norms, power or language. It relates to processes and decisions that seek to define actions to grant power and verify performance. The concept of governance revolves around the systems and structures that an entity uses to ensure management is regulated, controlled and held accountable. It involves the processes by which the board and management direct, govern, carry out administration and manage the organization. Additionally, it encompasses authority, accountability, stewardship, leadership, direction and control that are exercised in organizations. Essentially, it involves balancing the interests of the many stakeholders in an organization’s space.

Agency theory

Governance in saccos is not different from the theories applied in other sectors. Different authors have advanced theories in support of good corporate governance applicable to saccos. The agency theory explains the relationship between shareholders and company executives in business. The theory is concerned with resolving fundamental agency problems in modern firms arising from separation and unaligned goals between management (agents) and ownership (principals). The agents often have their own interests which are not necessarily aligned to the shareholders’ objective of profit maximization, hence the agency problem and which results into agency cost. Corporate governance is about putting in place disclosures, monitoring, oversight and corrective systems that can align the objectives of the principals and agents and hence minimize agency costs. The saccos’ board should exercise management oversight and steer them to act on behalf of members in the best way possible. Clearly, there is need to have mechanisms in place which will help define and circumscribe the extent of the powers conferred on the different sets of agents. This is easily done by setting professional standards to which every individual must adhere to in executing their mandate.

Stewardship theory

The stewardship theory view sacco directors as stewards whose behaviour is aligned with the objectives of their members. The selfless directors make decisions and direct the saccos in the best interest. The dominant motive which directs them to accomplish their job is their desire to perform excellently and thereby gain recognition. Therefore, governance according to this theory is a balancing act which in essence provides utility for all in the sacco space.

Risk management and control cannot be ignored. The work of risk management and internal controls in any organization is delegated by the sacco board to the risk management committee with the mandate of overseeing and reporting back to the board all matters related to the sacco’s risk including developing policies and evaluating their effectiveness. It also includes developing mitigation measures centering on fraud, irregularities and infringement of laws. The board should ensure that there is adequate review of the effectiveness of the sacco risk and internal control systems at least once every four months.

The 2017 report of SASRA indicated that in order for saccos to successfully compete with other players, they must immediately delve deep into the innovative world of repackaging their financial service and product offerings to address issues of efficiency, customer convenience, reliability of their services, improved accessibility, public confidence and security of customer data and information. They noted that there is a marked improvement in the uptake of technology and other information communication technology (ICT) driven financial services through third parties. However, the costs at which these services are offered is far from being efficient or reliable or sustainable. Even as they embrace this call and continue to develop value added products, there is need to ensure that good governance practices are integrated in all their efforts to become competitive. Credible governance frameworks are an inducement to valuable stakeholders who are interested in investing in the sector. Financial services sector in Kenya has a huge potential and a very critical role to play in job creation and economic growth.

Enhanced confidence

Good corporate governance ensures saccos’ success and economic growth because of increased small and large investors’ confidence leading to high capital. When saccos have adequate capital, they become effective and efficient, hence reducing wastage and managing risks sufficiently. Saccos that have embraced good corporate governance practices are consistently associated with both lower cost of equity and lower cost of debt capital locally and internationally. The correlation between good corporate governance practices and low cost of equity is more prominent in spaces where there are strong legal systems, clear and comprehensive disclosure practices and good will from the government. This correlation is attributed to asymmetric or lack of asymmetric payoffs received by creditors and shareholders.

Good governance practices have a positive impact on the share price. Sacco share prices (just like other organizations) are affected by global, domestic and local factors. To a large extent, saccos believe that governance issues rotate around elections of directors and auditors. However, it entails accountability, transparency and disclosure. Therefore, there is need to pay attention to changes in corporate laws, strengthening the disclosure requirements and establishing a strong regulatory body capable of balancing the challenging claims of managers, outside shareholders and creditors.

In conclusion, saccos should not relent in the effort to propagate and champion the cause of responsive governance frameworks.

Dr. Kellen Kiambati holds a PhD in business administration with a focus on strategic management from JKUAT and an MBA from KEMU. She is a certified business associate (CBPA) and a member of the Institute of Human Resource Management of Kenya. She is also the author of business Research Methods and can be reached on kellenkiambati@ gmail.com  

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2 COMMENTS

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