The Report on The State of Corporate Governance Practices of Issuers of Securities to the Public in Kenya 2024

1. FOREWORD

1.1. Message From Chief Executive Officer, Capital Markets Authority (Kenya), FCPA, Wyckliffe Shamiah

The State of Corporate Governance Report, 7th Edition, stands as a testament reflecting a journey of continuous improvement toward strengthening governance practices in Kenya's capital markets. It reflects not only the strides we have made but also our collective commitment to upholding global standards.

One of the standout achievements is the significant improvement in the annual weighted overall governance score of issuers (listed companies). From a Fair rating of 55% in the financial year 2017/2018, issuers have advanced to an impressive Good rating of 73.56% in 2023/2024. This remarkable improvement underscores the collective effort by issuers to refine & implement their governance frameworks, elevating corporate transparency, accountability, investor confidence and market integrity.

The Authority is currently conducting a deep dive ESG assessment to evaluate current ESG practices and the broader ecosystem within Kenya's capital markets. This comprehensive review will inform the refinement of the ESG Policy Framework while also identifying strategic incentives to attract ESG focused investments in Kenya.

Looking forward, the CMA is embracing cutting-edge technology to revolutionize ESG integration. By leveraging Artificial Intelligence (AI), machine learning and blockchain technology, the Authority is pioneering efforts to enhance how ESG data is analyzed, managed and reported. Such innovation positions Kenya's capital markets as a leader in modern, data driven ESG practices, ensuring sustainability remains at the core of our developmental agenda.

Together, let us forge a future where integrity, sustainability and innovation define corporate governance, not only within Kenya but across Africa and beyond. By surpassing expectations and setting new benchmarks, Kenya’s issuers can lead the way in shaping a resilient and inclusive financial ecosystem. Together, we are building a capital market ecosystem that is resilient, inclusive and forward-looking, a reflection of Kenya's position as a rising hub for sustainable investment in Africa.

1.2. Message from Director, Markets Operations, Capital Markets Authority (Kenya), Mr. Daniel Warutere

The launch of the inaugural Report on the State of Corporate Governance for Issuers of Securities to the Public in 2018 was an important moment in the evolution of corporate governance standards. It marked not just a milestone, but a transformative leap towards realizing an ambitious vision: to position issuers as regional and global leaders in governance excellence. This vision extends beyond Kenya, aiming to elevate corporate governance practices across Africa and set a benchmark on the global stage. With increasing focus on transparency, accountability and sustainability, the report underscores the commitment to shaping a more responsible and resilient corporate sector, one that meets the expectations of stakeholders, drives economic growth and fosters trust in capital markets.

Kenya’s corporate governance transformation mirrors broader trends across Africa, where initiatives such as the African Peer Review Mechanism (APRM) and the King IV Report on Corporate Governance (South Africa) have encouraged greater accountability and integration of governance with sustainability imperatives. Globally, frameworks like the OECD Principles of Corporate Governance and Integrated Reporting have further inspired issuers to align their practices with international standards, balancing financial performance with ESG priorities.

While many Kenyan issuers have demonstrated commendable progress in adopting sound governance practices, there remains a pressing need to enhance several key areas:

a. Boards must transcend mere compliance and focus on providing strategic oversight that ensures long-term value creation. This involves fostering diversity not only in gender but also in expertise, experience and perspective to promote more balanced, informed decision-making. Board members should actively challenge management decisions, ensure independent thinking and consider the impact of their decisions on shareholders and other stakeholders.

b. Ensuring the protection of shareholder rights is paramount. Issuers must be committed to transparent communication and regular, accurate reporting on financial performance, governance practices and the strategic direction of the business.

c. Strong internal controls and risk management systems are the backbone of a well-governed issuer. Issuers must adopt comprehensive frameworks that address various forms of risks and ensure that mechanisms for detecting fraud, mitigating conflicts of interest and safeguarding stakeholder interests are in place.

d. Issuers must establish mechanisms for regular and inclusive engagement, ensuring that the perspectives of all relevant parties are considered in corporate decision-making processes.

e. Corporate governance goes beyond financial performance to include ethical leadership and social responsibility. Issuers must embed ethical practices at every level of their operations, ensuring that decisions are made with integrity and that the issuer contributes positively to society.

As we look toward the future, the journey is far from over. The CMA is intensifying its engagement with issuers and stakeholders to co-create pathways toward governance excellence. This collaboration is rooted in the understanding that governance is not a box-ticking exercise but a dynamic process of cultivating resilience, innovation and sustainability.

These efforts signify a leap toward a future where good governance and sustainability practices are not aspirational goals but entrenched realities. Kenya stands at the forefront of driving corporate governance excellence in Africa, setting an example for issuers globally. Together, with the support of stakeholders, the vision is clear: fostering a resilient, sustainable and inclusive capital market ecosystem that thrives in a rapidly evolving global landscape.

2. EXECUTIVE SUMMARY

One of the standout achievements is the significant improvement in the annual weighted overall governance score of issuers (listed companies). From a Fair Rating of 55% in the financial year 2017/2018, issuers have advanced to an impressive Good Rating of 73.56% in 2023/2024. This remarkable improvement underscores the collective effort by issuers to refine & implement their governance frameworks, elevating corporate transparency, accountability, investor confidence and market integrity.

However, the annual weighted overall score for all issuers showed a decrease in performance, declining by 2.15% from 75.71% (Leadership rating) in the 2022/2023 financial year to 73.56% (Good rating) in the 2023/2024 financial year.

The decline was attributed to the following:

a) Failure to adhere to the principles of the CG Code following the enactment of POLD Regulations 2023 which has made the CG Code mandatory. Some of the key provisions implemented included the designation of Independent Directors and Non-Executive Directors in compliance with POLD Regulations 2023, constitution of various board committees and approval of specified policies and procedures by shareholders.

b) Move from disclosure-based assessment by the Authority to implementation-based approach where Issuers were expected to document specific initiatives on how they were implementing the provisions of the CG Code.

c) Issuers failed to provide specific details and documentation on how their governance framework recognizes the need for equitable treatment of all shareholders while also providing mechanisms for protection of minority and foreign shareholders.

Despite the decline in the overall performance by Issuers, the following three (3) principles improved in comparison to the FY 2022/2023: Commitment to good corporate governance improved from 78.60% (Leadership Rating) to 81.31% (Leadership Rating), Ethics and Social Responsibility principle improved from 74.82% (Good Rating) to 74.94% (Good Rating) whereas Accountability, Risk Management and Internal Control improved from 80.7% (Leadership Rating) to 80.72% (Leadership Rating).

This comprehensive assessment serves as a vital guide for Issuers, highlighting areas of excellence and pinpointing avenues for refinement, with an overarching aim to fortify corporate governance and sustainability practices, ensuring sustained growth, transparency and stakeholder confidence in the capital markets sector.