The Report on the State of Corporate Governance of Issuers of Securities to the Public in Kenya 2023

1. FORWARD

Message from Mr. Wyckliffe Shamiah, FCPA, Chief Executive Officer, Capital Markets Authority (Kenya)

The Code of Corporate Governance Practices for Issuers of Securities to the Public in Kenya, 2015, set a high bar for enhancing governance within Kenya's capital markets. Since its inception in 2016, it has steered issuers towards embedding robust governance principles and practices in their operations.

The State of Corporate Governance Report, 6th Edition, stands as a testament to fostering a culture of transparency, accountability and excellence within the realm of issuers.

Amidst this era of transformative change characterized by the advent of groundbreaking technologies like Artificial Intelligence (AI), blockchain and machine learning, the significance of robust governance practices cannot be emphasized enough. It transcends being a mere regulatory necessity; rather, it stands as the cornerstone upon which trust and sustainability are established. This report serves as a reflective tool, offering a clear view of advancements, accomplishments and the direction ahead.

Over the past 6 years, commendable strides have been witnessed as issuers embed good governance principles and practices into their DNA. However, this journey is not static; it is an ongoing evolution, a relentless pursuit that challenges the norms, expands horizons and welcomes innovation while unwaveringly upholding ethical standards.

The paradigm of corporate governance has expanded, encompassing Environmental, Social and Governance (ESG) considerations. Advocating for a holistic approach is crucial as custodians of these markets, where responsible business practices are as vital as financial performance.

This report represents more than just a snapshot; it's a narrative of the shared journey, a testament to the resilience and adaptability of Issuers. It underscores the need for perpetual vigilance, continuous improvement and unwavering dedication to the highest governance standards.

Let this report guide towards a future where integrity, accountability and sustainability form the bedrock of every decision both within the capital markets sector and beyond. Together, let's forge ahead, surpassing expectations and setting new benchmarks for excellence in corporate governance.

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

Reflecting on the journey thus far, the groundbreaking launch of the inaugural Report on the State of Corporate Governance for Issuers of Securities to the Public in 2018 was not merely a milestone; it represented a monumental leap toward realizing the ambitious vision outlined in the Capital Markets Master Plan (2014-2023) to position Kenya as the paramount hub of capital markets financing in Africa. This historic moment symbolized a resolute dedication to advancing corporate governance, a foundational pillar requiring the strengthening of governance standards while seamlessly aligning with regulatory requirements and global benchmarks.

In the past, the lack of an evaluation mechanism and publication of comprehensive governance reports left investors and stakeholders navigating through a maze of disjointed data to understand governance practices. However, the introduction of the Code signaled a seismic shift compelling issuers to publicly disclose vital governance documents such as board charters, terms of reference for board committees and policies. This transformation is not just about transparency; it establishes a pinnacle of reliability and accessibility in information, benefiting stakeholders including investors, researchers and academicians.

Though numerous issuers have shown commendable strides in adopting good governance practices, the pressing need remains to prioritize the effective management of board operations, stringent control mechanisms, fostering robust stakeholder relations and championing ethics alongside social responsibility. These fundamental principles stand as the bedrock of every issuer's essence, being quintessential for fostering enduring and sustainable growth.

Looking ahead, the aim is active engagement with issuers and stakeholders. The goal is to collaboratively chart pathways towards robust governance and sustainability practices. This engagement is not a mere box-ticking exercise; it is about cultivating issuers that not only compete but also thrive on sustainable practices. In addition, this engagement signifies a significant leap towards a future where embracing good governance and sustainability practices is not merely a goal but an embraced reality by all.

2. EXECUTIVE SUMMARY

The comprehensive assessment of issuers' performance in adhering to corporate governance principles as contained in the Corporate Governance Code reveals a positive trend towards fostering robust governance practices within the issuers’ operational frameworks. Of the assessed issuers, 31 secured a leadership rating, 8 attained a good rating and 6 achieved a fair rating whereas a reduced number of 4 issuers only falling into the needs improvement category. This reduction signifies substantive progress in embedding strong corporate governance practices within issuers organizational structures.

The annual weighted overall score by all issuers witnessed a commendable improvement surging from 72.27% (Good rating) in the financial year 2021/2022 to an impressive 75.71% (Leadership rating) in the financial year 2022/2023.

This substantial improvement underscores a collective dedication among issuers towards enhancing their governance structures and practices resulting in an elevated performance standard across the assessed period.

9. NEXT STEPS AND FUTURE FOCUS AREAS

a) Review of the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations 2002 (‘2002 Regulations’): The Authority finalized the review of the Public Offers Listing and Disclosure regulations for issuers of securities to the public in Kenya. This was necessitated by the need to incorporate emerging areas and streamline eligibility and listing requirements necessitating the review to overhaul the 2002 Regulations.

b) Re-definition of an independent director: Please take note that going forward, Regulation 2(1) of the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations 2023 provides that a director shall cease being independent after 6 years of continuous service.

c) Define cross directorship: To enhance clarity regarding the independence of independent directors as per the Corporate Governance Code, the Authority is actively addressing concerns raised by issuers regarding the definition of 'cross directorship.'

d) Review the corporate governance reporting templates and assessment methodology: The Authority will undertake a comprehensive regulatory review of corporate governance reporting templates and assessment methodology for issuers in order to maintain relevance.

e) Introduce risk-based approach in the corporate governance assessment process: The Authority is seeking to introduce a risk-based approach in assessing application of corporate governance requirements for issuers in Kenya to ensure a more targeted, efficient and effective assessment process.

f) Integrating sustainability into the listing requirements: The Authority is exploring avenues to integrate sustainability into the listing requirements, emphasizing the significance of ESG performance.

g) Endorsement of IFRS S1 and S2: The Authority fully embraces and advocates the implementation of IFRS S1 and S2, pivotal frameworks that underscore the significance of ESG considerations in financial disclosures.

h) NSE ESG Guidance Manual Alignment: The Nairobi Stock Exchange (NSE) ESG Guidance Manual will undergo revisions to align seamlessly with the new IFRS standards.

i) ESG Integration in Investment Decisions: The Authority will strongly encourage institutional investors to integrate ESG factors into their investment decision-making processes.

j) ESG Guideline: The Authority is committed to developing a comprehensive ESG guideline for the capital markets sector.

k) Carbon Markets: The Authority is actively dedicated to formulating a robust and all-encompassing carbon markets policy framework.