The Report on the State of Corporate Governance of Issuers of Securities to the Public in Kenya 2019

1.0 EXECUTIVE SUMMARY

The 2018/2019 Report on the State of Corporate Governance for Issuers of Securities to the Public presents another opportunity for the capital market to reflect on the improvements made since the publication of the 2017/2018 report. The assessment of corporate governance of issuers continues to provide a useful benchmark for the identification of progress made and areas for improvement. The report assessed 53 issuers of securities to the public. The Authority has already taken enforcement action against issuers who either delayed or failed to submit their corporate governance reports.

A) A snapshot of individual issuer overall weighted performance on all principles

The analysis highlighted the performance of individual issuers overall weighted performance on all principles and below is a snapshot of the findings.

7 in “Leadership” 17 in “Good” 21 in “Fair” 8 “Needs improvement”

[Figure 1: Individual Issuer overall weighted performance on all principles]

We note that 7 issuers in leadership were 3 from the banking sector, 2 from manufacturing & allied/automobiles & accessories sectors, 1 from the insurance sector and 1 from construction & allied sector. Most issuers were on a fair rating with 8 assessed as being in need of improvement. The 2018/2019 report indicates that there was commendable improvement by all issuers.

[Table 1.1: % change in performance by all issuers]

B) A snapshot of performance based on market capitalization

The analysis determined the performance of issuers on all principles based on their market capitalization as at 31 December 2018.

[Figure 2: Weighted Performance Based on Market Cap]

This chart illustrates that issuers with larger market capitalizations have performed better in the assessment compared to those with lower market capitalization.

C) Snapshot on the performance of issuers on each principle

The Code sets out specific corporate governance principles that issuers are required to adhere to. The analysis determined the performance of issuers on each principle.

[Figure 3: Performance of Issuers on Each Principle]

[Table 1: Issuer Performance on Each Principle in 2017/2018 Compared to 2018/2019]

• Top 3 principles on leadership rating in the financial year 2018/2019: Commitment to good governance had 13 issuers on leadership rating, followed by accountability, risk management & internal control and rights to shareholders which had 9 and 8 issuers respectively;
• Top 3 principles on good rating in the financial year 2018/2019: Rights of shareholders and accountability, risk management & internal control each had 24 issuers on good rating, followed by board operations & control and ethics & social responsibility which had 20 and 15 issuers respectively;
• Top 3 principles on fair rating in the financial year 2018/2019: Transparency & disclosure had 19 issuers on fair rating, followed by stakeholder relations and ethics & social responsibility which had 19 and 17 issuers respectively; and
• Top 3 principles on need improvement rating in the financial year 2018/2019: Stakeholder relations had 21 issuers on need improvement rating, followed by ethics & social responsibility and transparency & disclosure each with 15 issuers.

D) Snapshot on the sectoral overall performance of issuers on each principle

It is worth noting that the sectors with the highest overall scores did not necessarily perform well in all categories. Similarly, sectors with lower scores are not necessarily weak in all parameters. No sector as a whole scored a leadership rating in any of the principles. Notably, three sectors namely agriculture, commercial & services/telecommunications and manufacturing & allied/automobiles & accessories scored needs improvement in stakeholder relations. In addition, the agriculture sector scored needs improvement in board operations & control, ethics & social responsibility and transparency & disclosure principles.

E) Snapshot on ESG performance

On the integration of sustainability and ESG in business strategies, issuers improved from a fair rating in 2017/2018 to a good rating in 2018/2019. Ethics and sustainability in risk management process improved from a needs improvement rating in 2017/2018 to a fair rating in 2018/2019. Introduction of integrated reporting improved from a need improvement rating in 2017/2018 to fair rating in 2018/2019. However, there is need for issuers to more clearly disclose the frameworks they are adopting for such reporting.

There is a need for issuers to develop policies and strategies on sustainability while measuring the impact of their operations on society and the environment.

F) Overall weighted performance of all issuers

The 2018/2019 findings suggest a fair status of 61.00% weighted overall score compared to 55.00% weighted overall score reported in the previous financial year 2017/2018 in the application of corporate governance practices by Kenyan issuers of securities to the public.

G) Stakeholders feedback report and implementation status

Following the implementation of the Code of Corporate Governance Practices for Issuers of Securities to the Public 2015, the Authority has been receiving feedback from stakeholders in regard to the implementation challenges. Some of the key feedback received and proposed and/or actions taken are outlined in the report.