Corporate Failure of the Sugar Industry in Kenya: a Study of Mumias Sugar Company

Abstract

Corporate governance is central to the success of any business entity, irrespective of its legal formation. This is because corporate governance encompasses the processes, practices and a system of rules that anchors the interests of all shareholders and stakeholders hence, good decision making. In the recent times, corporations have focused on corporate governance to avoid corporate failure after the collapse of major corporations both globally and locally. One of the major foci in the aftermath of major corporate failure in corporations has been the efficacy of the legal and regulatory framework in anchoring corporate governance in corporations. In Kenya, the sugar industry is currently insolvent yet it is an industry that played a major role in the economic and social development in Kenya and supported the livelihood of its citizens before and after independence in 1963. This study endeavoured to prove that corporate failure is detrimental to the social and economic growth of a country, a conduit of devastating losses of investment by the shareholders and stakeholders and a core factor for a myriad of social effects such as school dropout, rise in crime rate which emanates from unemployment and loss of a livelihood. The major factor that has contributed to the collapse of the sugar industry is the lack of proper corporate governance mechanisms majorly; improper ownership structure, the improper composition of board of directors and lack of optimum internal controls and disclosure mechanisms. The study was therefore conceived to analyse these and their contribution to the collapse of the sugar industry in Kenya with particular reference to Mumias Sugar Company which began as a state-owned entity in 1973 and privatized in 2002. The study revealed that the minority shareholders who collectively hold the majority shareholder are not satisfactorily protected by the existing legal and regulatory basis to make a significant contribution to the control and the decision-making process of the company. The composition of the board of directors has also hurt the performance of the industry due to lack of diversity, improper board size and lack of board independence influenced by political patronage. Additionally, the research examined the effect of internal control disclosure mechanism in the sugar industry vis a vis the sufficiency of the legal framework. To strengthen the study, the researcher analysed the Indian sugar industry to import some lessons for the Kenyan sugar industry. The study relied on the agency theory, the stakeholder’s theory and resource dependency to advance this thesis. The three theories were necessitated by the shift of business from the focus of profit maximization for the shareholder to the current focus on a wide range of investors for instance customers, suppliers, employees, and the local community in which the corporations operate, while the resource dependency was necessary since the sugar industry relies on external resources to operate. To achieve the objective of the study, both doctrinal and non-doctrinal research methodologies and supplemented with interviews of both shareholders and stakeholders. This study recommended inter alia a need for privatization of the sugar industry with the government holding minority shares if any, a dispersed ownership structure in publicly listed companies, a board composition with the proper size, diversity and independence and, transparent internal control and disclosure mechanisms. Furthermore, the study recommended a robust legal and regulatory framework that anchors an efficient corporate governance system that can revitalize and sustain the sugar industry in Kenya.