Cooperative board: tenure, related parties and a whistleblower

Naming a principle earns nothing; the marks are in the consequence.

1. Fourteen-year chairman. The accumulation of institutional knowledge was useful in year three; in year fourteen it produces a chair who controls information flow, the board agenda and the relationship with management. New directors cannot effectively challenge someone who has outlasted them and can outvote them. Succession becomes impossible while the incumbent remains. Recommended maximum tenure is typically nine years, with a documented extension only on stated grounds.

2. Chief executive's brother-in-law chairs the audit committee, and the internal auditor reports to the chief executive. The audit committee exists to provide independent challenge to management over financial reporting and internal control. A close family relationship with the chief executive removes that independence in substance, whatever the formal declaration says. Worse, the internal auditor's reporting line means any finding critical of management must pass through the person it criticises - the classic recipe for suppressed findings. The internal auditor must report functionally to the audit committee, with a private session at every meeting without management present.

3. The KSh 22,000,000 related-party contract without recusal. The vice-chairman was both a decision-maker and the beneficial owner of the counterparty. Members' funds were committed to a transaction on which the board could not bargain at arm's length, and there is no evidence of competitive quotation or valuation. Harm: potential overpricing of an unknown amount, an unenforceable or voidable contract, exposure of the directors to liability, and - critically - no disclosure to members or in the financial statements as required for related-party transactions.

4. Chief executive approving loans above KSh 5,000,000 alone. This is a breach of delegated authority, an absence of segregation of duties, and the concentration of credit risk in one individual who is also subject to no check. In a deposit-taking cooperative, a single unwise large loan can impair members' savings. There is also nothing stopping a loan to a related party of the chief executive.

5. Retaliation against the whistleblower within two weeks. The timing is the evidence. The effect is broader than one employee: every member of staff now knows that raising a concern about the chief executive ends your career. Future fraud will go unreported. This is also a legal exposure under whistleblower protection provisions and employment law, and it has created a strong inference that the allegation is true.

6. Audit nine months overdue and no AGM for two years. Members have been denied their statutory right to accounts, to elect directors, to question the board and to receive any surplus. The board's mandate has expired in substance. Late or absent audit removes the only external check on the executive and is the standard precursor to unrecorded liabilities and asset misappropriation.

The related-party contract

1. Do not ratify it at next week's meeting. Ratification by the same board that approved it without disclosure cures nothing and compounds the breach.
2. Establish a committee of disinterested directors (excluding the vice-chairman and anyone aligned with him) with authority to obtain an independent valuation of the signage contract and three comparable market quotations. If the price paid exceeds market, seek recovery of the difference from the counterparty or the director.
3. Legal advice on rescission and on the directors' duty to account. Consider whether the contract can be set aside and whether the vice-chairman should be asked to resign pending the outcome.
4. Disclose fully: in the 2024/2025 financial statements as a related-party transaction, to members at the AGM, and to the regulator if the society is supervised. Concealment is a separate and more serious offence than the original conflict.
5. Fix the process going forward: a conflict-of-interest register signed annually by every director and senior officer; mandatory written declaration before any item; recusal from discussion and from voting, with the director leaving the room and receiving no papers on that item; and a minute recording the declaration, the recusal and the arms-length justification. Ensure the society's by-laws and the board charter actually say this.

The whistleblower

1. Reverse the transfer immediately and confirm in writing that no detriment will follow. Record the reason given for the move and the decision-maker.
2. Refer the allegation to the audit committee, chaired by an independent member - which requires resolving the brother-in-law issue first, or appointing an ad hoc committee of non-executive directors. Because the allegation concerns the chief executive, an external investigator is preferable; internal investigation by management is not credible.
3. Preserve evidence now: the loan register, credit committee minutes for the last 24 months, the approval authority matrix, and email records. Evidence disappears when the subject of the complaint learns of it.
4. Review every loan above KSh 5,000,000 approved in the last two years: identify who approved, whether the borrower is connected to any director or officer, whether security exists and whether repayments are current. Report the findings to the board and, if impairments or related-party lending are found, to the regulator.
5. Adopt a whistleblowing policy with a confidential channel that goes directly to the audit committee (or an external hotline), an anti-retaliation clause, and an annual report to the board on the number and outcome of reports.
6. Do not ask the complainant to "put it in writing to the chief executive" - that is the retaliation channel.

Composition

• Publish a tenure policy - a maximum of two three-year terms with a documented extension for continuity only. Apply it prospectively so the current chairman has a defined end date.
• Recruit at least two independent non-executive directors with financial reporting and credit-risk experience who have no family, commercial or employment link to management. Independence must be defined in the by-laws, not assumed.
• Separate the roles of chair and chief executive. The chair runs the board and appraises the chief executive; the chief executive runs the business.
• Build a skills matrix against the strategy and disclose it; a nine-member board of members' representatives with no accounting expertise cannot supervise a KSh 1.8bn balance sheet.
• Introduce annual board and director evaluation, and a succession plan for the chair and the chief executive.

Committees

• Audit committee: three non-executive directors, all independent of management, at least one with recent and relevant financial experience, chaired by someone with no relationship to the chief executive. Written terms of reference including authority to engage the external auditor, review internal audit plans and meet management privately.
• Internal auditor: functional reporting line to the audit committee, administrative line to the chief executive, unrestricted access to records and an annual charter approved by the committee.
• Credit committee: a documented delegated authority matrix - for example managers up to KSh 500,000, credit committee to KSh 10,000,000, board above that - with two-signature rule, mandatory related-party screening at application, and monthly reporting to the board of all approvals, arrears and exceptions.
• Risk or finance committee if the loan book warrants it, covering liquidity, arrears and capital.

Reporting calendar and immediate remediation

1. Appoint or confirm the external auditor and complete the 2024 audit before the budget is approved, not after. Approving a 2026 budget on 2023 numbers is planning blind.
2. Convene the annual general meeting within the statutory window: table the audited accounts, elect directors, and disclose the related-party transaction and the investigation outcome.
3. Adopt a board calendar: quarterly meetings with standing items (management accounts, loan arrears, covenant and liquidity review, conflict register, whistleblowing report), an annual strategy session, and a fixed audit timetable.
4. Commission a governance review by an independent party, or invite the regulator to conduct one, and publish the action plan with owners and dates.

One caution for the board next week: approving the 2026 budget while the 2024 accounts are unexamined and the whistleblower is unreported would be a further breach of the duty of care. Deal with items one and two first.