EFFECT OF CORPORATE GOVERNANCE ON PERFORMANCE OF SUGAR MANUFACTURING FIRMS IN KENYA: A CASE OF FIRMS IN WESTERN KENYA

ABSTRACT 
Corporate governance is increasingly becoming important in organization as an approach of improving performance. Corporate governance is the system through which organizations are directed and controlled. It is concerned with transparency, accountability and power relationship within and outside the organization. There has been an increasing importance in corporate governance in organizations in recent years. Some studies have argued for a positive relationship while others argued that there is a negative relationship between corporate governance and organizational performance. This study sought to determine the effect of corporate governance on organizational performance of sugar manufacturing firms in western Kenya. The research employed correlational survey design. The population of the study constituted of eleven sugar manufacturing firms in Western Kenya. A census survey study of sugar manufacturing firms in Western Kenya was conducted. In each sugar firm, 4 respondents were targeted, that is, the C.E.O. marketing manager, production manager and Human Resource manager. Primary data was collected using structured questionnaires. Descriptive statistics was used to summarize the data. Pearson’s correlation coefficient was used to determine the relationship between corporate governance and organizational performance of sugar manufacturing firms, multiple regression analysis was used to determine the effect of corporate governance on organizational performance. Findings revealed that the corporate governance practices were positively related to the performance of sugar manufacturing firms in western Kenya, although not very strongly (r = 0.512, p < 0.05). This means that the corporate governance practices which involve board characteristics, board size, top management characteristics and Shareholders communication policy and Continuous disclosure had an impact on the performance of sugar firms in Western Kenya. The study recommended areas of further research.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
The concept of corporate governance originated in the Nineteenth Century when incorporation was being advocated for as a way of limiting liability (Fletcher, 1996). It began to be used and spoken about more commonly in the 1980s (Parker, 1996) Adams (2002) perceives creation of the registered company to be the real starting point for any discussion on corporate governance. The issues associated with corporate governance have assumed multifarious dimensions with wide implications, especially for profit-oriented business organizations. There has been growing interest in corporate governance in recent times that it has become an issue of global significance. The main reason for the search for a universal understanding of the indicators, drivers and mitigating instruments of corporate governance has been heightened in recent times by the spectacular failure of top organizations including Enron, WorldCom, Tyco, Adelphia, Arthur Anderson, Lehman Brothers, Freddy Mac, Fanny Mae, Goldman Sachs, Marconi, Northern Rock, Parmalat and Yukos (Duke & Kankpang, 2011). In most corporate organizations, conflict of interest is a pervasive phenomenon which characterizes relationships between and among the various stakeholders. Conflict exists at many levels and in varying degrees of intensity. For instance, it is commonly observed between the majority and minority shareholders, and between the internal organizational controllers and some of the external stakeholders. 

Sugar industry ensures food security improves rural lives and provides sustainable livelihoods for millions of Kenyans, but it also has to suffer heavy government intervention. The industry is under constant threat of collapsing due to perennial challenges. The major crises the sub-sector is currently experiencing include liberalization and increasing competition from cheap sugar imports, poor industry policies and structures that fail to address basic problems that would assist in recovery and continued government intervention that has resulted in mismanagement of the industry (Nwadioke, 2009). 

The reasons for poor corporate governance are found throughout the world which is mostly coupled with fraudulent acts and other major malpractices. They include irregularities in accounts, non-compliance with law, nepotism, non-merit based system and exploitation of minority shareholders (Love, 2011). Sugar firms have also had their share in corporate frauds and scandals. However the government has taken strides to reduce such malpractices and their effects on corporate environment. Governance is all about encouraging corporate sector to be accountable, fair, transparent and responsible as spelled out by the World Bank president. Companies today have established the concept of corporate governance which is characterized by major components that include company polices, rules and regulations, board of directors, role of CEO and chairman, stock holders, creditors, institutional investors and regulators reporting and maintaining overall transparency. fairness and accountability about the business operations (Nwadioke, 2009). 

The World Bank, in 1999, stated that corporate governance comprises of two mechanisms, internal and external corporate governance. Internal corporate governance, giving priority to shareholders’ interest, operates on the board of directors to monitor top management. On the other hand, external corporate governance monitors and controls managers’ behaviors by means of external regulations and force, in which many parties involved, such as suppliers, debtors (stakeholders), accountants, lawyers, providers of credit ratings and investment bank (professional institutions). Consequently, corporate governance mechanism has been a crucial issue discussed again (Pham et al., 2007). Poor corporate governance has been a problem in the sugar industry. For efficiency and profitability of the industry, the reform process should be geared towards developing and implementing policies that will ensure that the principles of good corporate governance are instilled and maintained. This will ensure competitiveness and sustainability of the industry business enterprises and attract investment (Kenya Sugar Board, 2009). 

Corporate Governance 
Effective corporate governance was identified to be critical to all economic transactions especially in emerging and transition economies (Banerjee et al., 2009). However, at varying levels of agency interactions, market institutional conditions reduced information imperfections and facilitated effective monitoring of agents which impinged on the efficiency of investment. Likewise, corporate governance assumed the center stage for enhanced corporate performance. What then is corporate governance? Corporate governance is the system through which organizations are directed and controlled. It is concerned with transparency, accountability and power relationship within the organization. The purpose of corporate governance is to ensure that the organization is managed in the long term interest of the shareholders (Joe, 2007). Corporate governance can also be referred to as set of rules and procedures that ensure that managers do indeed employ the principles of value based management. The essence of corporate governance is to make sure that the key shareholder objective-wealth maximization is implemented (Rashid, 2008). It is concerned with the relationship between the internal governance mechanisms of corporations and society’s conception of the scope of corporate accountability (Low, 2006). Keasey et al, (1997) included ‘the structures, processes, cultures and systems that engender the successful operation of organizations. 

Scholars argue that corporate governance is represented by structures and processes laid down by a corporate entity to minimize the extent of agency problems as a result of separation between ownership and control (Fama, 1980). It must also be indicated that different systems of corporate governance will embody what are considered to be legitimate lines of accountability by defining the nature of the relationship between the company and key corporate constituencies. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as; boards, managers, shareholders and other stakeholders and spells out the rules and procedures and also decision making assistance on corporate affairs (Duke & Kankpang, 2011). By doing this, it also provides the structure through which the company objectives are set and the means of obtaining those objectives and examining the value and the performance of the firms. 

The improvement of corporate governance practices is widely recognized as one of the essential elements in strengthening the foundation for the long-term economic performance of countries and corporations (Kyereboah, 2007). The term corporate governance relates to how corporations, firms, organizations among others, are owned, managed and controlled. 

Moshe (2006) stressed that corporate governance is about ensuring that the business is running well and investors receive a fair return. Cremers and Nair (2005) asserted that core corporate governance institutions respond to two distinct problems, one of vertical governance (between distant shareholders and managers) and another of horizontal governance (between a close, controlling shareholder and distant shareholders). 

Organizational Performance 
Measuring and analyzing organizational performance plays an important role in achieving organizational goals. The performance is usually evaluated by estimating the values of qualitative and quantitative performance indicators (Maharm & Anderson, 2008). It is essential for a company to determine the relevant indicators, how they relate to the formulated company goals and how they depend on the performed activities. Measuring firm performance using accounting ratios is common in the Corporate Governance literature Maham and Anderson (2008) in particular, return on capital employed, return on assets, and return on equity. Similarly, economic value added can be as an alternative to purely accounting- based methods to determine shareholder value by evaluating the profitability of a firm after the total cost of capital, both debt and equity are taken into account (Mazumbar, 2006). In this study, Market share, Growth in sales, profit and output in sales were used to measure organizational performance. 

Corporate governance promotes reduction of waste on non-productive activities such as shirking, excessive executive remuneration, perquisites, asset-stripping, tunneling, related- party transactions and other means of diverting the firm’s assets and cash flows (Bhagat & Bolton, 2008). It also results in lower agency costs arising from better shareholder protection, which in turn engenders a greater willingness to accept lower returns on their investment. The firm ultimately ends up enjoying higher profits as it incurs lower cost of capital. Importantly, firms become more attractive to external financiers in direct proportion to a rise in their corporate governance profile. Finally, managers become less susceptible to making risky investment decisions, and focus more on value-maximizing projects that generally facilitate organizational efficiency. The ultimate outcomes of these corporate governance benefits are generally higher cash flows and superior performance for the firm (Love, 2011). 

Sugar Industry in Kenya 
The sugar sub-sector is mainly concentrated in the western part of Kenya. These include the populous provinces of Nyanza, Western and parts of Rift valley. Potential also exists in the Eastern and Coastal belts (Sucam, 2003). Shortly after independence in 1963 the government set up Muhoroni (1966), previously East African Sugar Company Ltd in 1961; Chemelil (1968); Mumias (1973); Nzoia (1978); South Nyanza (1979). Miwani Sugar, started in 1922 as private investment, was taken over in 1970. Private investment include: West Kenya Sugar, Soin Sugar Company, Kibos Sugar and Allied Industries Ltd, Butali Sugar Company and Busia Company. Of the private investments only Butali and West Kenya are presently in operation, the rest are proposed or at varying stages of construction. At present, both Miwani and Muhoroni are under receivership; only the latter is operational. According to Kenya Sugar Board(2005), the state stake holding in the industry is: Miwani Sugar (49%); Muhoroni (82.78%); Chemelil (97.64%); Nzoia (98.87%); South Nyanza (99.79%). The government has divested in Mumias and Miwani, currently retaining 20 percent in the former, also the sole firm presently listed at the Nairobi Stock Exchange. The large government ownership makes the industry prone to state and political interference (Sucam, 2003). The industry is one of the largest contributors to the agricultural sector Gross Domestic Product, directly and indirectly supporting and estimated 6 million Kenyans (20% of the Kenyan population), produces over 500,000 metric tons of sugar for domestic consumption (saving the economy in excess of US$250 million or Kshs. 20 billion in foreign exchange annually), GOK (2006). 

The prominence of the sugar industry in Western Kenya has prompted the growth of regulatory and other industry affiliated bodies. The government oversees the sub-sector principally through the Ministry of Agriculture (MoA) and the Kenya Sugar Board,the latter being made of representatives from the state, sugar companies, farmers’ organization and general industry. The industry has over 150 smaller, artisanal ‘jaggerries’, competing for cane with the regular factories (Harding, 2005). Other related industries are: Agro-chemical and Food Company Limited started in the early 1980s with some government stake holding. This scenario has stimulated growth of rural infrastructure in feeder roads, transport services, spurring economic, educational, medical and other social services and the expansion of other rural facilities, all vital to western Kenya’s economic well-being. This desire was expressed in the Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning in Kenya. Despite these investments, self-sufficiency in sugar has remained elusive over the years as consumption continues to outstrip supply. Total sugar production grew from 368,970 tons in 1981 to 520,404 tons in 2007. Domestic sugar consumption increased even faster, rising from 324,054 tons in 1981 to 741,190 tons in 2007. 

The main industry organ is the Kenya Sugar Board. KSB was established to regulate, develop and promote the sugar industry; coordinate the activities of individuals and organizations in the industry and; facilitate equitable access to the benefits and resources of the industry by all interested parties. KSB has 12 members and renewable tenure of three years. Another key player is the Minister of Agriculture who imposes levies on domestic and imported sugar, Special Development Levy (SDL), makes the regulations and appoints the SAT members in consultation with the Attorney General. The stakeholders in the industry include farmers, the government, sugar factories, and out-grower institutions like the Kenya Sugarcane Growers Association (KESGA), Kenya Sugar Research Foundation (KESREF), importers, financial institutions, transporters, consumers and lobby groups like Sugar Campaign for Change (SUCAM). Unfortunately, not all of them have been involved in the due processes and most of them have not been represented. This has resulted in a small group making decisions that affect the entire industry. This is occasioned by political interference. 

The performance of the sugar industry has continued to be quite dismal in Kenya, therefore Kenya continues to live off its legacy of being self-sufficient in terms of sugar production. According to sources from the Mumias Sugar Company, current production stands at 520,000 metric tons and consumption which has increased steadily over the last years at 740,000 leaving the country with a deficit of 220,000 metric tons. From the list of registered millers and jaggeries provided by the KSB, Muhoroni and Miwani Sugar Company are currently under receivership. Muhoroni Sugar has been under receivership for the last four years Ramisi Sugar Factory collapsed in 1988 although plans are underway to revive it. According to the agricultural field officers sanctioned by the government to revive Ramisi, commercial growing of cane at the Kiscol project, was expected to commence by June 2010, while it was anticipated that the factory was to be fully operational by 2011. In terms of production arrangements, most Sugar companies typically have a factory, human resources, agriculture and finance department. The factory department has recently been split up into quality control and engineering in a number of the factories such as Chemelil. The sugar companies also maintain nucleus estates to ensure there is enough supply of cane. Out growers’ scheme on the other hand covers individuals or private sugar–cane farmers. Despite the existence of nucleus estates, sugar companies still complain of sugar cane shortage a problem which has also contributed to the production gaps in the industry.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 66 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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