Feedback Statement to Issuers - November 2018

CODE OF CORPORATE GOVERNANCE FOR ISSUERS OF SECURITIES TO THE PUBLIC – STAKEHOLDER FEEDBACK STATEMENT. The Authority hosted issuers’ audit committees, MDs/CEOs, company secretaries and governance auditors in three separate fora from 30th October to 1st November 2018 to deliberate on the report on state of corporate governance of issuers of securities to the public in Kenya. Following the successful deliberations at the fora, we publish the following feedback statement on the key matters highlighted by the participants: | Comment | Consideration | | :--- | :--- | | 1. There was not sufficient clarity on Authority’s expectations on the conduct of self-assessment by issuers when completing the CG Reporting Template. | The CG assessments rely on publicly available information considering this is what is accessible to shareholders, potential investors and other relevant stakeholders. | | 2. What trends could be derived from the assessments noting that the firms reported to be in leadership were all from the banking sector. | Generally, most firms with a primary industry regulator, especially those in the financial sector, and who are already obligated to make public disclosures by other regulatory instruments posted a higher rating. However, other firms, other than those from the banking sub-sector, were also assessed to be in leadership in different principles although on average not registering “leadership” ratings. | | 3. The rationale for analysis of performance of issuers on sectoral basis and impact of outliers on overall sectoral ratings due to the impact of the law of averages. | The Authority’s decision to analyze the performance by sectors was based on the need to develop an appropriate CG scorecard cognizant of the fact that this was the first year of application of the Code and balancing this with the need to establish a baseline for future comparison. However, the Authority will continue engaging key stakeholders to determine an appropriate time to make additional and more granular disclosure of specific-issuer performance in the future. | | 4. Issuers raised concerns with respect to multiplicity of audits and the associated compliance costs. | It was indicated that the additional audits highlighted are either statutory or sector-specific regulatory requirements and the Authority may not have jurisdiction to determine their suitability and timing. Where there are inconsistencies or overlaps between different regulatory provisions, issuers are advised to meet the higher regulatory standards. The rationale for the requirement of distinct governance and legal and compliance audits was elaborated. The Authority specifically noted the concern raised around the frequency, cycle, cost and scope of governance audits and will be engaging stakeholders to agree and inform an appropriate way forward. | | 5. The rationale for the nine-year benchmark for the tenure of independent directors after which they are re-designated as non-executive was sought. | The 9-year tenure was informed by best practice paying due regard to local circumstances. An independent director is generally deemed to have become too familiar with the company after such a period and therefore there would be a likelihood of loss of independence. | | 6. Guidance was sought in relation to the rationale for the term of office of external auditors which has been pegged at 6-9 years. | It was explained that this provision was drafted after a robust stakeholder engagement process and is reflective of best practice in this area. Generally, an external auditor is considered to have lost their independence after a continuous audit of a company for several years. | | 7. There was concern that the current assessment methodology is more focused on disclosures, rather than actual application of good corporate governance practices. | The requirement that the Chairman of the Board, CEO and Company Secretary sign off the reporting template is meant to ensure ownership and accountability. The Authority will continue to welcome feedback to inform improvement of the assessment methodology. | | 8. Concerns were raised that there are entities that are analyzing, ranking and publishing corporate governance reports whose objectivity is in doubt. | The Authority reiterates that there are no entities which have been commissioned to conduct corporate governance assessments and rankings for issuers. Any other assessments and rankings are not pegged on the Code but are subjective evaluations based on metrics and methodology which has neither been approved by the Authority nor aligned to the provisions of the Code. | | 9. Issuers sought to find out the rationale for an annual governance audit. | The feedback was noted and will inform further stakeholder engagements which may necessitate regulatory reforms, if deemed appropriate. | | 10. The Authority was challenged to enhance the analysis provided in the Corporate Governance Scorecard/Report. | The Authority has taken the feedback from the stakeholders and expects to prepare much more enriched reports in future. | | 11. The Authority was tasked to consider incentivizing issuers who demonstrate leadership in application of good corporate governance practices. | The Authority considers the best incentive to be the value derived by the firm as a consequence of adoption of good corporate governance practices. | | 12. Some issuers interrogated the basis for extensive disclosures required vis a vis sensitive information and risk of loss of competitive advantage. | Investors are increasingly demanding information necessary for them to make investment decisions. The spirit of the Code is espoused under the principle of transparency and disclosure. | | 13. Issuers wanted to understand how the Authority was leveraging technology in enhancing its regulatory mandate. | One of the strategic objectives in of the Authority in its 2018-2023 Strategic Plan is leveraging technology in execution of its mandate. | | 14. Issuers wanted to know if the CMA was going to provide a specific format for Integrated Reporting and ESG reporting. | The Authority does not purpose to be prescriptive and therefore issuers are encouraged to adopt best practices including relevant frameworks. | | 15. The Authority was challenged to demonstrate how present-day challenges and opportunities presented by youth and technology are being considered. | The Code considers technology as an enabler as well as a source of risk. Furthermore, the Social and Governance aspects of the ESG framework incorporate technology and youth. | | 16. In order to encourage new issuers, participants sought to know if there are any plans to have a staggered approach for compliance. | The Authority continuously encourages stakeholders to provide feedback necessary to facilitate further development and deepening of the Kenyan capital market. |