A Guide to Corporate Governance Excellence

Corporate governance mechanisms cover various aspects of a company’s management, such as board structure and the existence of an active market for corporate control. Good corporate governance leads to efficient resource utilization, minority shareholder protection, better decision-making, and improved relationships with stakeholders like workers, creditors, etc. It is crucial for attracting long-term, patient capital that drives sustained economic growth. This report evaluates Kenya’s corporate governance policy framework, highlighting recent regulatory improvements, offering policy recommendations, and providing investors with a benchmark to assess corporate governance in Kenya.

  The journey of Corporate Governance in Kenya under the Companies Act (No.17 of 2015) 

Kenya recently modernized its company laws, as they had not been updated since the colonial era. In 2015, the country passed a new Companies Act, which heavily drew from the United Kingdom’s 2006 Companies Act. The new Act did not introduce an entirely new code for corporate governance in Kenya, but it did establish a stricter regime that requires substantial compliance, even in regards to corporate governance. This is seen in the codification of directors’ common law duties, which includes acting in accordance with the company’s constitution, exercising independent judgement, managing the company with skill, and acting in the best interest of the company. If a director breaches these duties, there are civil consequences, which ensures accountability. The Act also emphasizes transparency among the board of directors, requiring them to declare any interests in existing transactions. Additionally, the audit committee of a quoted company must establish appropriate corporate governance principles and assess the company’s compliance with them annually. While the new Act is a step forward in promoting good corporate governance, it still faces some challenges in ensuring compliance for all companies.

The Principles of Good Corporate Governance.

1 Transparency/Openness – The company or firm must be controlled and managed in a transparent manner.

2 Integrity – The powers of management and control of companies or firms should be exercised with integrity at all times.

3 Accountability – All the organs of management and control.

4 Compliance with laws, regulations and guidelines – Where specific laws prescribe ethical behaviour, people may implement good practices and comply. If we look at The Companies Act, of 2015, it provides for extensive shareholders’ rights. The Act provides that The Capital Markets Authority issues binding guidelines for good corporate governance for both listed and unlisted companies. If we look at the Banking sector, licensed institutions under the Central Bank of Kenya have mandatory requirements under The Banking Act to comply with the CBK guidelines on good corporate governance.

A good corporate governance framework consists of the following elements:

1. A set of relationships between a company’s management, its board, its shareholders and other stakeholders. 
2. A structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.
3.  Proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders.

Corporate governance in unlisted companies 

Most private companies are owned and controlled by single individuals or a group of insiders, for example, a family. In most cases, owners continue to play a significant direct role in their management. Therefore, with regard to private companies, good governance in this context is not a question of protecting the interests of absentee shareholders rather it is concerned with coming up with a framework of policies and processes that add value to the business and ensure the long-term success of the company.  In light of this, private companies face greater corporate governance challenges than listed companies as much of the governance framework of listed companies may be externally imposed by various forms of regulations and formal listing requirements cast in the law while private companies have greater scope in the law to define their own governance strategy owing to the less onerous requirements applicable to them

Having an effective governance framework that defines the firm’s approach to each of the above issues is of equal importance to both private and listed companies. The importance of private companies concerning themselves with corporate governance can be seen in many aspects. First, Performance and Internal efficiency. Corporate governance is concerned with the decision-making processes and procedures that assist the company in achieving its objectives. Consequently, as the firm seeks to improve the sustainability of its activities, it ought to give greater thought to issues of governance. 

Governance also becomes an increasing issue for unlisted companies as they develop new sources of finance. In the event they turn to banks and the likes for financial assistance, this will necessitate the implementation of a more explicit governance framework as external financiers seek assurance that their investments will be well managed. Managing capital and illiquidity risk is another importance of private companies concerning themselves with corporate governance. Shareholders in private companies are restricted in terms of their ability to sell their ownership within the company. These restrictions may be imposed by the shareholders themselves. As a result, the shareholders of unlisted companies may find themselves being “captive” owners of a company. An effective corporate governance framework provides shareholders in unlisted companies with some reassurance that their interests will continue to be safeguarded by the board and the company management despite the fact that there’s no easy exit from their ownership stake.

The Code of Corporate Governance Practices for Issuers of Securities to the Public 2015 

The Capital Markets Authority utilized their power under sections 11(3)(v) of the Capital Markets Act to release the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 (“The Code”). Both listed and unlisted public companies in Kenya are expected to adhere to this Code. The Code replaces the Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya, 2002. It outlines principles and recommendations concerning structures and processes that companies should implement to make good corporate governance a fundamental part of their business dealings and culture. The Code advocates for the adoption of standards that surpass the minimum requirements set by the Companies Act. The Code moves from a “Comply or Explain” approach to an “Apply or Explain” approach that is principle-based and recognizes that a satisfactory explanation for any non-compliance will be acceptable under certain circumstances. Therefore, boards must fully disclose any non-compliance with the Code.. 

This applies to all companies that offer both debt and equity securities to the public, regardless of whether they are listed or not. Issuers’ boards must create additional internal policies and strategies to promote their companies’ growth and safeguard the interests of shareholders and stakeholders. The 2015 Code improves on the 2002 guidelines by clarifying undefined terms like conflict of interest and stakeholders. It also covers previously unmentioned but significant topics, such as stakeholder engagement, legal compliance, and ethical compliance audits, in addition to financial audits.

The 2015 Code is similar to the Companies Act as it covers conflict of interest at all management levels and outlines the roles and duties of directors. The code also promotes transparency by requiring issuers to disclose more information. To enhance the efficiency and effectiveness of boards, the code mandates professional training and development for directors. Overall, the 2015 Code has raised the standards of corporate governance.

Conclusion and Recommendations 

Following the research carried out, the following are  the recommendations proposed in a bid to have private companies be brought within the ambit of the laws relating to corporate governance. They were as follows: 

1. Amend the Small Companies Regime which was created by the Companies Act, 2015 to: 

• Expressly include privately owned companies and avoid including them through inference and analysis criteria set for a company to fit in the regime. 

• Make the financial reporting and audit requirements for companies within this regime more stringent. This will ensure more accountability and transparency within the company. 

2. Inclusion of privately-owned companies within the scope of application of the 2015 Code of Issuers to the Public in a similar manner that South Africa applies the KING IV code to all companies in that jurisdiction

3. Adoption of Corporate Governance Guidance Code for Private/ Unlisted Companies in Kenya

Emerging themes /issues in Corporate Governance Globally 

1.  Leadership and strategic management;
2. Transparency and Disclosure;
3. Compliance with Laws and Regulations; 
4.  Communication with stakeholders; 
5.  Board independence and governance; 
6. Board systems and procedures;
7.  Consistent shareholder and stakeholders’ value enhancement; and 
8.  Corporate social responsibility and investment