The Report on the State of Corporate Governance of Issuers of Securities to the Public in Kenya 2022

THE REPORT ON THE STATE OF CORPORATE GOVERNANCE OF ISSUERS OF SECURITIES TO THE PUBLIC IN KENYA 2022

This Report on the State of Corporate Governance of Issuers of Securities to the Public in Kenya is a publication of the Capital Markets Authority on the status of corporate governance for issuers. While reasonable care has been taken in preparation of this report, the Authority accepts no responsibility or liability whatsoever resulting from the use of information contained herein. Please note that CMA has no objection to the material contained herein being referenced, provided an acknowledgement of the same is made. Any comments or suggestions on any of the details may be sent to issuergovernance@cma.or.ke

1. FOREWARD

Message from Mr. Wyckliffe Shamiah, FCPA, Chief Executive Officer. Every journey begins with small incremental steps. We have been on a journey to good governance and sustainability in the capital markets. Since 2016 when the Code of Corporate Governance Practices for Issuers of Securities to the Public (the Code) came into effect, we have continued to see transformation amongst issuers. This can be demonstrated by the annual governance reports that the Authority has been publishing every year since 2018. In the beginning, the requirements under the Code were considered heavy and costly. But aware of the benefits and value derived from strengthening good governance, the Authority as well as issuers were committed to implementing the Code. Some of the requirements such as independent legal and governance audits, annual training of board members, ESG and sustainability reporting, among others were unexpected. But over the years, these requirements, among others, have become the practice for issuers. Governance audits have been entrenched and issuers have benefitted from the audit findings and recommendations. The State of Corporate Governance Report for 2022 exemplifies the progress made and the direction the Kenyan capital market is taking. It is worth noting that on the commitment to good governance, there is commendable progress. Board structures, appointment procedures, diversity, skill set and capacity development have gained ground. Inevitably, the principle of commitment to good corporate governance had the best score compared to other principles.

Message from Mr. Daniel Warutere, Ag. Director, Market Operations. The enactment of the Code brought a new dawn in the capital markets in Kenya. The Code created an environment where issuers and the Authority would periodically hold sessions to discuss the state of governance for issuers, raise any areas of improvement and highlight emerging issues. This has been the practice for the past five years. At the end of each financial year, every issuer submits a self-assessment report on how it has applied the provisions of the Code. Upon receipt of the self-assessment report, the Authority undertakes an independent assessment to ascertain the issuer’s state of application of the Code. Arising from this, a governance assessment report for each issuer is generated, discussed with the issuer and findings and recommendations agreed upon. As a result of this practice, we have continued to witness commendable improvement from each of the issuers. Boards, with the support of company secretaries, have continued to play a pivotal role in entrenching good corporate governance and sustainability practices. The Authority calls on the boards of each issuer to make the annual governance assessment report a part of the board’s agenda.

2. EXECUTIVE SUMMARY

Good corporate governance practices are positively linked to corporate sustainability performance, and corporate sustainability performance leads to improved financial performance. In addition, corporate sustainability performance mediates the link between corporate governance and financial performance. This report has been prepared based on an assessment of corporate governance practices by 55 issuers. It is important to note that two issuers who have the same governance structure were assessed as one hence bringing down the number of assessed issuers to 54. However, some issuers were excluded from the assessment as they failed to submit either the reporting template or the full set of annual reports for assessment purposes. The Authority is considering taking appropriate enforcement action against issuers who have repeatedly violated the continuous reporting governance requirements. The weighted average score by the assessed companies remained at a “Good Rating” as the previous assessment but with a slight increase in the percentage score from 70.15% to 72.27% as discussed in the subsequent sections of this report. The number of issuers in the leadership category increased from 25 to 30, those in the good rating category increased from 8 to 12, those in fair rating decreased from 10 to 6 while those in the needs improvement rating increased from 5 to 6. It is important to note that all sectors had a fair rating and above in all the principles save for the Construction and Allied sector which had a needs improvement on stakeholder relations. It is important to note, however, that only the banking sector scored a leadership rating on all the principles.

3. BACKGROUND

The annual assessment of corporate governance practices by issuers of securities commenced in 2017/2018, against the principles outlined in the Code. The Code requires issuers to implement the Principles and Recommendations in the Code and report at the end of every financial year on how they have applied the requirements. The Authority undertakes an independent assessment of the issuers’ self-assessment, leading to the issuance of the final report to each issuer. The report on the state of corporate governance of issuers of securities to the public is then developed which presents the performance of all issuers on corporate governance and sustainability requirements.

3.1 Assessment methodology

3.1.1 Assessment tools

The Corporate Governance Reporting Template, Corporate Governance Scorecard and the Assessment Methodology are the main tools for reporting, measuring and monitoring the application of the Code. The reporting template, filled and submitted by issuers, serves to enhance adherence to governance requirements as well as disclose the status of the application of each requirement. On the other hand, the Corporate Governance Scorecard is used internally by the Authority to determine the level of implementation of the Code. To comply with the Authority’s continuous reporting requirements, all issuers are expected to submit the completed reporting template together with the complete annual report within four (4) months following the end of the financial year. Subsequently the same is to be uploaded on the issuer’s website. On receiving the Corporate Governance reporting templates and the annual reports, the Authority undertakes an independent assessment to verify the status of governance of each issuer. This is done in line with an approved methodology and scoring criteria. The Scorecard covers the seven (7) principles of the Code: 1. Introduction to the Code (focus on commitment to good governance); 2. Board operations and control; 3. Rights of shareholders; 4. Stakeholder relations; 5. Ethical and social responsibility; 6. Accountability, risk management and internal control; and 7. Transparency and disclosure.

3.1.2 Governance assessment

The assessments of corporate governance practices by issuers is based on publicly available and accessible information such as annual reports, issuer websites, notices, circulars, articles of association, resolutions of shareholders’ meetings, Board Charter, media publications, codes of conduct, sustainability reports and other sources of public information as available. To minimize assessor subjectivity and to enhance accuracy and consistency in the review process, a check and balance methodology is applied through peer review. The issuer scores zero points on each question if they have not observed the practices, 1 point if they have partially observed, 2 points if they have fully observed and 3 points if they have gone above and beyond the requirements of the code. Based on the final score, issuers will be grouped into four groups; Leadership rating (75% and above), Good rating (between 65% and 74%), Fair rating (between 50% and 64%) and Needs improvement rating (below 50%).

3.1.3 Assessment analysis

The review process takes into consideration the fact that some sectors like automobiles & accessories, telecommunications and investment services contain a single issuer. The sectors were therefore consolidated with related categories for analysis purposes. The result was that: a) Automobiles & Accessories was consolidated with Manufacturing & Allied; b) Telecommunications was consolidated with Commercial & Services; and c) Investment Services was consolidated with Investments.

4. FINDINGS AND RECOMMENDATIONS ON SPECIFIC CORPORATE GOVERNANCE PRINCIPLES

4.1. COMMITMENT TO GOOD CORPORATE GOVERNANCE

The principle measures issuers’ commitment to good governance based on inter alia including the development, implementation and regular review of a board charter, distinction of the responsibilities of the board from management, awareness of the requirements of the Code, and focus on sustainability, among others. An analysis of performance on this principle shows that 32 and 15 issuers scored leadership rating and good rating respectively. 3 Issuers had a fair rating while the rest had a needs improvement rating.

4.2. BOARD OPERATIONS AND CONTROL

The structure and composition of the board affect the development and functioning of institutions. The economic success of an organization is not only dependent on efficiency, innovation and quality management but also on how effective the board is. The assessment of this principle checks how boards of issuers have applied the Code’s requirement to its operations and control environment.

4.3. RIGHTS OF SHAREHOLDERS

The Code of Corporate Governance places a strong emphasis on the rights of shareholders. The boards of directors should be an effective oversight mechanism in safeguarding the interests of all shareholders including improving the role of Annual General Meetings (AGMs), proactive provision of information to the shareholders and strengthening minority shareholder legal rights and protection.

4.4. STAKEHOLDER RELATIONS

Stakeholders play a very important role in the achievement of the company’s strategy and long-term growth. A company not only deals with its shareholders, customers and regulators but also with the interest of its suppliers, society, media and potential investors in mind.

4.5. ETHICS AND SOCIAL RESPONSIBILITY

With the current increased pressure from business stakeholders on companies to make meaningful contributions to the greater social good, issuers are encouraged to be good corporate citizens to the society in which they operate. This principle assesses the extent to which the issuer considers not only the financial performance but also the impact of the company’s operations on society and the environment.

4.6. ACCOUNTABILITY, RISK MANAGEMENT AND INTERNAL CONTROL

This Principle calls on issuers to ensure that the board takes responsibility and provides oversight on the critical functions of the company. The board is responsible for the completeness and accuracy of financial information, ensuring the independence of external auditors and the proper functioning of the audit committee. In addition, internal controls and risk management are important aspects of the company’s corporate governance framework.

4.7. TRANSPARENCY AND DISCLOSURE

Disclosure of information to the public and transparency in business operations is very important for influencing companies’ performance and protecting investors. Good governance calls for timely and balanced disclosure of all material information as required by all laws, regulations and standards. Fair, timely and cost-effective access to the information by users is also very critical as this will improve and maintain investor confidence.

5. WEIGHTED PERFORMANCE

5.1. OVERALL WEIGHTED SCORES ACROSS PERIODS

A total of 30 assessed issuers had a leadership rating. 12 had a good rating, 6 had a fair rating and the rest had a Needs Improvement rating. It is worth noting that the number of issuers in the Leadership Category has consistently increased across all the assessment periods. On the other hand, the number of issuers with a Needs Improvement rating has been dropping.

5.2. WEIGHTED PERFORMANCE ON ALL PRINCIPLES

Issuers had a leadership rating on three principles; Commitment to good corporate governance, Rights of Shareholders and Accountability, Risk Management and Internal Control. The principle of commitment to good corporate governance had the best score of 76.8%. The rest of the principles were rated ‘Good’ with Transparency and Disclosure, Board operations and Control, and Stakeholder relations having 72.50%, 70.32% and 70.27% respectively. The Ethics and Social Responsibility principle had the least score at 69.48%.

5.3. WEIGHTED OVERALL PERFORMANCE PER SECTOR

An analysis of the sectoral performance indicates that three sectors had a leadership rating. The Banking sector had the highest rating at 83.12%. It is worth noting that the banking sector has had the best score across all the assessment cycles. All the other sectors had a good rating save for the Agricultural sector which had a fair rating of 59.75%. Although the sector remained to be the least performed, a slight improvement was noted from the previous rating of 55.04%.

6. EMERGING ISSUES & NEW DEVELOPMENTS

The global, regional and local governance landscape is dynamic and continues to evolve. Emerging topics include ESG guidelines, SASB standards, the establishment of the ISSB, resolutions from COP27, the development of a Kenya Carbon Exchange, increased engagement by institutional investors, strategic succession planning, and refined policies on directors’ remuneration.

7. NEXT STEPS

1. Strengthen adoption through onsite governance inspections. 2. Continue hosting annual governance workshops. 3. Develop a policy framework for an overarching ESG and Integrated Reporting legal framework. 4. Promote the uptake of the Stewardship Code for Institutional Investors. 5. Facilitate institutional investors to sign as signatories. 6. Review the effectiveness and performance of company secretaries. 7. Develop suitable governance guidance to cover issuers set up as LLPs. 8. Take appropriate enforcement action on violations of mandatory provisions and continuous reporting obligations.

Executive Summary

The 2022 assessment of 54 issuers reveals a sustained improvement in corporate governance practices, with the weighted average score increasing from 70.15% to 72.27%. While the banking sector achieved a leadership rating across all principles, most other sectors demonstrated good or fair performance, with the exception of the construction sector's needs improvement rating on stakeholder relations. The Authority intends to pursue enforcement actions against issuers repeatedly violating reporting requirements and will continue developing frameworks to address emerging governance challenges including ESG integration and LLP governance.