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A COMPREHENSIVE REVIEW OF THE CORPORATE GOVERNANCE
LEGISLATIVE FRAMEWORK ENCOMPASSED IN THE COMPANIES ACT
2015 IN KENYA
THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE MASTERS OF
LAW (LL.M) COURSE.
SUBMITTED BY: JACELYN WANGARI MUKOMA
REGISTRATION NUMBER: G62/82258/2015
SUPERVISOR: DR. PAUL MUSILI WAMBUA
NOVEMBER 2017
ii
DECLARATION
This research project is my original work and has not been presented for examination in
any other university.
Signature ………………………………. DATE ….………………................
JACELYN WANGARI MUKOMA REG NO G62/82258/2015
Declaration by Supervisor
I hereby confirm that this research project was carried out under my supervision
Signature ………………………………. DATE.………………................
PROF. PAUL MUSILI WAMBUA
ASSOCIATE PROFESSOR OF LAW
UNIVERSITY OF NAIROBI
iii
DECLARATION OF ORIGINALITY
DECLARATION
1. I understand what plagiarism is and I am aware of the University’s policy in this
regard
2. I declare that this Thesis is my original work and has not been submitted
elsewhere for examination, award of a degree or publication. Where other people’s
work has been used, this has properly been acknowledged and referenced in
accordance with University of Nairobi’s requirements.
3. I have not sought or used the services of any professional agencies to produce this
work.
4. I have not allowed and shall not allow anyone to copy my work with the intention
of passing it off as his/her own work.
5. I understand that any false claim in respect of this work shall result in disciplinary
action, in accordance with the University Plagiarism Policy
JACELYN WANGARI MUKOMA
__________________________________
Signature
iv
DEDICATION
This thesis is dedicated to my mother Anne Mukoma, my brother Roy Mukoma, other
relatives and friends, without their encouragement and support, I could not have made it
this far.
v
ACKNOWLEDGMENTS
I express my gratitude and appreciation to my Supervisor Prof. Paul Musili Wambua for
his insight and patience he expressed in writing this thesis.
To my mother Anne Mukoma, brother Roy Mukoma, other relatives and friends whose
prayers, support and encouragement saw me through this undertaking.
To the Lord Almighty, for giving me the resilience and persistence to complete this task. I
could not have come this far without his grace.
vi
TABLE OF CONTENTS
DECLARATION ............................................................................................................... ii
DECLARATION OF ORIGINALITY .......................................................................... iii
DEDICATION ................................................................................................................... iv
ACKNOWLEDGMENTS ................................................................................................. v
LIST OF LEGISLATIONS ............................................................................................... x
LIST OF ABBREVIATIONS ......................................................................................... xii
LIST OF CASES ............................................................................................................ xiii
ABSTRACT ..................................................................................................................... xiv
CHAPTER ONE: INTRODUCTION AND BACKGROUND TO THE STUDY ....... 1
1.1 Introduction ................................................................................................................... 1
1.2 Background of the study ............................................................................................... 2
1.3 Statement of the problem .............................................................................................. 6
1.4 Justification of the Study ............................................................................................... 7
1.5 Theoretical/Conceptual Framework and Literature Review ......................................... 8
1.5.1 Theoretical/Conceptual Framework ........................................................................... 8
1.5.2 Literature Review ..................................................................................................... 10
1.6 Objectives of the Study ............................................................................................... 16
1.7 Research Questions ..................................................................................................... 17
1.8 Hypothesis ................................................................................................................... 17
1.9 Research Methodology ................................................................................................ 18
1.9.1 Doctrinal Approach .................................................................................................. 18
1.9.2 Empirical Approach.................................................................................................. 18
vii
1.10 Chapter Breakdown ................................................................................................... 20
CHAPTER TWO: REVIEW OF THE LEGISLATIVE FRAMEWORK ON
CORPORATE GOVERNANCE IN KENYA ................................................................ 21
2.1 Introduction ................................................................................................................. 21
2.2 The legislative framework on corporate governance in Kenya ................................... 22
2.2.1 The Constitution of Kenya 2010 .............................................................................. 22
2.2.2 Capital Markets Act .................................................................................................. 24
2.2.3 Nairobi Securities Exchange (NSE) Regulations ..................................................... 30
2.2.4 The Companies Act 2015 ......................................................................................... 31
2.3 Gaps Identified in the Companies Act 2015................................................................ 35
2.3.1 Lack of a Firm Approach to Declaration of Interest by Directors ........................... 35
2.3.2 Lack of Recognition on the Role of Non-Executive Directors ................................ 37
2.3.3 Ambiguity in the Definition of Small Companies Regime ...................................... 38
2.3.4 Lack of a Financial Reporting Standard ................................................................... 40
2.3.5 Lack of a Guideline on Directors’ Remuneration Report ........................................ 42
2.4 Attempts at Legislative Reforms ................................................................................. 43
2.4.1 The Companies Amendment Act 2017 (‘the Amendment’) ..................................... 43
2.4.2 Companies (General) Amendment Regulations 2017 (‘the Regulations’) .............. 45
2.5 Conclusion ................................................................................................................... 47
CHAPTER THREE: BEST CORPORATE GOVERNANCE PRACTICES:
LESSONS FROM THE UNITED STATES OF AMERICA AND SOUTH AFRICA49
3.1 Introduction ................................................................................................................. 49
3.2 Evolution of Corporate Governance in South Africa and USA .................................. 50
3.2.1 South Africa ....................................................................................................... 50 3.2.2 United States of America ................................................................................... 51
3.4 Financial Reporting Function ...................................................................................... 53
viii
3.5 Disclosure and Declaration of Interest ........................................................................ 57
3.6 Directors’ Remuneration Report ................................................................................. 59
3.7 Companies Regime ..................................................................................................... 61
3.8 The Role of Non-Executive Directors ......................................................................... 62
3.9 Conclusion ................................................................................................................... 62
CHAPTER FOUR: DATA AND ANALYSIS................................................................. 64
4.1 Introduction ................................................................................................................. 64
4.2 Data Findings .............................................................................................................. 64
4.2.1 Response Rate .......................................................................................................... 64
4.2.2 Demographic information ........................................................................................ 65
4.2.3 Category of the respondents ..................................................................................... 66
4.2.4 Designation of the Respondents ............................................................................... 66
4.2.5 Years of experience in teaching/ working in corporate governance ......................... 67
4.3 Data Analysis: Empirical Research Confirms Desk Research Findings ..................... 68
4.3.1 Responses to the Questionnaire................................................................................ 69
4.3.2: Other Responses Received ...................................................................................... 73
4.7 Discussion ................................................................................................................... 74
4.8 Conclusion ................................................................................................................... 76
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS ................................................................................................. 78
5.1 Summary of Findings .................................................................................................. 78
5.2 Conclusions ................................................................................................................. 79
5.3 Recommendations for Reform .................................................................................... 79
5.4 Proposal for Further Research ..................................................................................... 82
BIBLIOGRAPHY ............................................................................................................ 83
ix
APPENDIX 1: RESEARCH QUESTIONNAIRE ........................................................ 90
x
LIST OF LEGISLATIONS
Capital Markets Act
Companies Act 2015
Companies Amendment Act 2015
Companies (General) Amendment Regulations 2017 (Yet to be enacted)
Constitution of Kenya 2010
LIST OF REGULATIONS
Code of Corporate Governance Practices for Issuers of Securities to the Public
Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya
Guidelines on Principles of Corporate Governance for Public listed Companies 2002
Nairobi Securities Exchange Market Participants (Business Conduct and Enforcement)
Rules
xi
xii
LIST OF ABBREVIATIONS
CD&A – Compensation Discussion and Analysis
CMA – Capital Markets Authority
CBK - Central Bank of Kenya
CSR – Corporate Social Responsibility
ICDC - Industrial Commercial & Development Corporation
KWAL - Kenya Wine Agencies Limited
KNTC - Kenya National Trading Corporation
NSE – Nairobi Securities Exchange
PCAOB – Public Companies Accounting Oversight Board
SEC – Securities Exchange Commission
xiii
LIST OF CASES
Dodge v Ford Motor Co 170 NW 668
European and North American Railway Company v Poor
Flagship Carriers Ltd v Imperial Bank (Unreported, 1999) (HC)
Joseph Munyiri Munene V Attorney General & Chief Magistrate’s Court Nairobi Petition
503 of 2009
xiv
ABSTRACT
Corporate governance is fundamental to the performance of any company. The global
trends in corporate governance have prompted countries to incorporate international
standards in corporate governance into their regulatory framework. This study seeks to
analyze the effectiveness of the Companies Act 2015 in ensuring compliance with best
practices in corporate governance in Kenya. The Companies Act 2015 introduced notable
reforms in line with global trends in corporate governance. However, ensuring
compliance with best practices is highly unlikely as the Companies Act 2015 lacks an
effective enforcement mechanism. As a result, some of its provisions are still not in effect
whereas others were poorly drafted creating a lacuna in the law which is likely to
encourage managerial hubris in companies. This research will note the progress made in
company law in Kenya. It will look into previous studies in the topic. It will integrate the
findings from a doctrinal and empirical approach. Comparisons shall be drawn with other
jurisdictions to identify best practices from which Kenya can learn. A conclusion shall be
drawn based on the information collected and recommendations made.
1
CHAPTER ONE: INTRODUCTION AND BACKGROUND TO THE STUDY
1.1 Introduction
“…Corporate governance is the structure and system of rules, practices and processes by
which an organization is directed, controlled and held accountable. It encompasses
authority, accountability, stewardship, leadership, direction and control exercised in
organizations. Corporate governance essentially involves balancing the interests of the
many stakeholders in an organization…”1
A sound corporate governance regulatory framework should ideally promote fair markets.
It should be in line with the rule of law and place effective supervisory mechanisms to
ensure compliance. An effective corporate governance regulatory framework should
promote the founding principles of corporate governance. It should be keen not to over-
regulate to prevent conflicts of interests and to promote entrepreneurship. The overall
purpose of regulation is to serve public interests. Sufficient power to supervise should be
vested in a body as well.
The objective of this research is to analyze the effectiveness of the Kenyan regulatory
framework in ensuring compliance with the corporate governance principles and
structures. Specifically, the study illustrates that there is still more to be done despite the
enactment of the Companies Act 2015 to ensure compliance with corporate governance
principles. The study argues for the adoption of a deterrent approach in legislation and
mechanisms to be put in place to ensure compliance with corporate governance principles
and structures. Further, the study advocates for the streamlining of the existing laws on
corporate governance. It is important to note that corporate governance practices should
1 Joseph K Kinyua and Prof Margaret Kobia, ‘Mwongozo: The Code of Governance for State Corporations’
(Public Service Commission and State Corporations Advisory Committee 2015).
2
not be a preserve of public listed companies only. Corporate scandals are often attributed
to the abuse of power and mismanagement by directors as well as the lack of an effective
regulatory framework and supervisory mechanisms for corporate governance.2
The Companies Act 2015 was a good attempt at updating company law in Kenya in line
with best corporate governance practices. However, it could have accomplished more.
This research identifies some of the gaps in the Act.
1.2 Background of the study
Corporate governance became prominent over the years with the privatization of
companies, takeovers and corporate scandals in the US. Corporate governance rules were
promoted to protect investors.3 The enactment of the Sarbanes Oxley Act in the US was
significant because it went beyond the scope of financial disclosure and imposing
sanctions for breach of the provisions. It was aimed at directly addressing corporate
governance. Scholars have stated that it is not possible to have uniform governance codes
that are best suited for all organizations and situations.4
The corporate governance agenda cannot be underestimated due to its ability to promote
economic growth, boost investor confidence and societal growth. Corporate governance is
concerned with how power is exercised through decision-making. Good corporate
governance encompasses aspects of good leadership, accountability, transparency and
balancing interests of stakeholders.
The Principles of Corporate Governance in Kenya were developed out of borrowing from
2 ‘The Emergence of Corporate Governance in Russia - ScienceDirect’
<http://www.sciencedirect.com/science/article/pii/S1090951603000506> accessed 1 December 2017. 3Sanjai Bhagat and Roberta Romano, ‘Empirical Studies of Corporate Law’ 1 Handbook of Law and
Economiccs 3. 4Aulana Peters, ‘Sarbanes-Oxley Act of 2002, Congress’ Response to Corporate Scandals: Will The New
Rules Guarantee“Good” Governance and Avoid Future Scandals?’ (2004) 28 Nova Law Review
<http://nsuworks.nova.edu/cgi/viewcontent.cgi?article=1279&context=nlr>.
3
those of developed countries through committees tasked with developing these principles.
The first step towards achieving good corporate governance standards was through the
Companies Act Cap 486 (now repealed) that was enacted after independence. It heavily
borrowed from England’s Companies Act 1948 and with time, it was unable to curb the
agency problem due to emerging trends in corporate governance and current market
practices in Kenya.5 Through the enactment of the Companies Act 2015, Kenya made a
substantive step in corporate governance. corporate governance in Kenya is rooted in the
Constitution 2010 and replicated through the enactment of other legislations such as the
Companies Act 2015, Capital Markets Act, Prudential Guidelines issued by the Central
Bank of Kenya and Mwongozo-Code of Corporate Governance for State Corporations.
These legislations shall be discussed further in this research.
The Constitution of Kenya 20106 establishes the constitutional framework for corporate
governance in both public and private institutions. It is binding on all persons, including
artificial persons such as companies. The values of the rule of law, good governance,
social justice and integrity are equally binding on all persons. Chapter Six outlines the
principles that form the basis of good governance.7 These principles include integrity,
accountability, transparency and accountability. The essence of the Constitution was to
quell impunity in governance.8
Company law in Kenya is primarily based on Common Law and has been handed down
5 Lois M. Musikali, ‘The Law Affecting Corporate Governance in Kenya: A Need for Review’ 19(7)
International Company and Commercial Law Review 213. 6Constitution of Kenya 2010. 7Nicholas K Letting’, ‘Corporate Governance in Kenya’ (Wanderers Club, Johannesburg, South Africa, 28
October 2015)
<https://www.chartsec.co.za/documents/2015SpeakerPresentations/2%20%20%2011h25%20%2016.%2
0Dr%20Letting%20CORPORATE%20GOVERNANCE%20IN%20KENYA%2028%20OCTOBER%2
02015%20SOUTH%20AFRICA.pdf> accessed 24 July 2017. 8 Otiende Amollo, ‘Corporate Governance, Corruption and Failing Institutions’ (2016).
4
for decades through case law. The Companies Act 20159 still preserves this English
heritage. As a result, its provisions are based on Common Law doctrines for example,
directors’ duties, right of protection of shareholders, among others. Its enactment has
compelled companies to incur more running costs.10 It has gone to the extent of codifying
directors’ duties, making it possible for directors’ to be held liable and penalties being
imposed upon breach of their duties. Shareholders are better protected from abuse as
compared to the Companies Act Cap 489 as they can pursue claims against directors.
However, the Companies Act 2015 fails where it does not recognize the mandate of non-
executive directors, external auditors, duties of directors and shareholder rights.
Furthermore, it adopts a comply or explain approach in enforcement of its provisions.11
The comply or explain approach is one that requires companies to oblige with certain
regulation but does not require them to practice every rule set out in the code.12 This
approach makes the enforcement mechanism difficult and exposes stakeholders to abuse.
The Act does not provide for a follow up mechanism where companies do not comply
with its provisions. Furthermore, the Office of Registrar of Companies have a limited
mandate in terms of ensuring compliance to the provisions.
The Capital Markets Act Chapter 485A was enacted to regulate and facilitate a fair capital
market in Kenya. The Act establishes the Capital Markets Authority (CMA) to serve as
the oversight authority for the stock exchange, central depository and persons licensed
under the Capital Markets Act. The CMA has published Guidelines on Corporate
9Companies Act 2015. 10Richard Harney, ‘The New Companies Act 2015 Has Coome into Operation In Kenya’ (Bowman Gilfillan
Africa Group’s Coulson Harney Office In Nairobi, Kenya) <http://www.bowmanslaw.com/wp-
content/uploads/2016/08/The-New-Companies-Act-2015-Has-Come-into-Operation-In-Kenya.pdf>
accessed 23 May 2017. 11Companies Act (n 9). 12 ‘Comply or Explain’ <http://www.corporategovernanceboard.se/the-code/comply-or-explain> accessed 1
December 2017.
5
Governance Practices by Public Listed Companies.13 To assist in execution of its
mandate. All public listed companies are expected to observe these guidelines. CMA
revoked the Guidelines on Corporate Governance Practices by Public Listed Companies
in Kenya, 2002 and issued the Code of Corporate Governance Practices for Issuers of
Securities to the Public, 2015 vide Gazette Notice No. 1420 of 4th March 2016.14 The new
guidelines are based on an “apply or explain” approach. The apply or explain approach
requires companies to select rules from the code that are best suited for them. However,
they are required to explain their selection of the rules they choose to comply with.15 The
new guidelines have mandatory provisions that set the threshold for minimum standards.
Companies are expected to fully disclose non-compliance to the concerned stakeholders
but are expected to commit towards compliance.16
The Prudential Guidelines are issued by the Central Bank of Kenya (CBK) and are
intended for institutions licensed under the Banking Act Chapter 488. Pursuant to the
Section 33 of the Banking Act, the Prudential Guidelines also outline Guidelines on
Corporate Governance. They are intended to sustain steady financial and banking
institutions. However, they are not intended to impair the decision-making capacity of
employees. The Guide serves as a code of conduct for employees, shareholders and the
management of banking institutions as well as the Chief Executive Officer (CEO). It
defines the following ethical values as key for the board of directors in making decisions:
transparency, accountability, fairness and transparency. The responsibilities of the Board
and Shareholders are outlined. Further, it highly recommends for the evaluation of the
13Capital Markets Act. Pursuant to Sections 11(3)(v) and 12 14‘The Kenyan Code of Corporate Governance 2016’ <https://mulenwa.wordpress.com/2016/10/24/code-of-
corporate-governance-2016/> accessed 24 May 2017. 15 Sridhar Arcot, Valentina Bruno and Faure Grimaud, ‘Corporate Governance in the UK: Is the Comply-or-
Explain Approach Working?’ (Corporate Governance at LSE Discussion, November 2005)
<http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp581%20Corporate%20Governan
ce%20at%20LSE%20001.pdf>. 16‘Kenya Law | Kenya Gazette’ <http://kenyalaw.org/kenya_gazette/gazette/volume/MTI5MQ--
/Vol.CXVIII-No.21> accessed 24 May 2017.
6
Board.17 CBK has put in place mechanisms tailored to the banking and financial sector to
ensure compliance to these guidelines.
The Organization Cooperation for Economic Development (OECD) established codes for
corporate governance for state owned corporations. In January 2015, this move was
embraced by Kenya by establishment of the Mwongozo-Code of Corporate Governance
for State Corporations.18
1.3 Statement of the problem
From the foregoing, company directors are entrusted with management of assets of a
company by the shareholders. The mismanagement of companies is faulted on the failure
of the directors in discharging their duties coupled with a weak regulatory framework.
The Companies Act 2015 was a good attempt at enhancing Kenya’s corporate governance
regulatory framework. However, there are still some gaps in the Act that are likely to be
abused.
This study intends to cure the inadequacy of the law by proposing that despite the
codification of directors’ duties by the Companies Act 2015, there is need to ensure that
there are mechanisms in place to ensure that best corporate governance practices are
upheld. The law in its current state lacks the potential to ensure compliance due to the
“comply or explain” approach it adopts. It is not deterrent in nature. Despite the
Companies Act 2015 being a step in the right direction, it instills a false sense of
confidence among investors and potential investors. Recent scandals such as Imperial
Bank, Chase Bank and recently Nakumatt which is facing turbulent times in business are
classic examples of consequences of non-compliance with good corporate governance
17‘PGs - PRUDENTIAL-GUIDELINES.pdf’ <https://www.centralbank.go.ke/wp-
content/uploads/2016/08/PRUDENTIAL-GUIDELINES.pdf> accessed 24 May 2017. 18 Kinyua and Kobia (n 1).
7
practices. Unless the regulatory framework is reviewed to reflect the change in economic
patterns, the Kenyan economy is going to suffer from the negative effects from corporate
scandals.
1.4 Justification of the Study
In practice, duties of directors are based on common law. Common law has been
incorporated into the laws of Kenya to supplement what the latter does not provide. The
common law fiduciary duties of directors include the duty of care and diligence. The
existing legislative framework is not keen on discouraging abuse of power in companies.
Despite the laws in place, there are still corporate scandals where directors go unpunished
which gives the impression that the legislative framework is not sufficient to discourage
non-compliance with the recommended best practices.19
Corporate scandals have redefined the management of companies. Corporate governance
plays an important role in developing countries particularly in development of their weak
economies. Corporate governance ensures transparency and accountability in the market
place. In the 1990s, both the public and private sectors were marred with the lack of
accountability which was bred out of a culture of corruption and nepotism.20 In 2002, the
Capital Markets Authority (CMA) published Guidelines on Principles of Corporate
Governance for Public listed Companies in an attempt to keep up with international
trends.21 However, these guidelines took a “comply or explain” approach as there is no
provision for consequences in the event of breach of any of the guidelines.22
19‘Petition 503 of 2009 - Kenya Law’ <http://kenyalaw.org/caselaw/cases/view/68763> accessed 20 April
2017. 20Jacob Gakeri, ‘Enhancing Kenya’s Securities Markets through Corporate Governance: Challenges and
Opportunities’ 3 1. 21Guidelines on Principles of Corporate Governance for Public listed Companies 2002 1. 22‘Microsoft Word - CG ROSC Kenya Final.doc - 908190ROSC0Box00Kenya0200700PUBLIC0.pdf’
<https://openknowledge.worldbank.org/bitstream/handle/10986/20449/908190ROSC0Box00Kenya020
0700PUBLIC0.pdf?sequence=1&isAllowed=y> accessed 20 April 2017.
8
The current trends in corporate governance demand high standards of corporate
governance for both public and private companies due to the changing dynamics. This is
aimed at creating value in the long term. Stakeholders expect more from the directors
hence the need for more reforms in management of companies. Investors are demanding
more oversight on companies.23
Further, corporate governance and corporate social responsibility (CSR) complement
each other in molding any company’s objectives. Companies are under pressure to value
different aspects within the communities they operate, for example, environmental
impact, and violation of human rights, among others. Socially responsible companies
ensure that they make profits but also consider the well-being of other stakeholders while
managing the company affairs. Directors are expected to create a balance between the two
factions.24
1.5 Theoretical/Conceptual Framework and Literature Review
1.5.1 Theoretical/Conceptual Framework
The main theories supporting this research are agency theory and stakeholder theory.
The agency theory was propounded by Jensen and Meckling in 1976.25The theory refers
to a relationship involving a one or more people (referred to as the “principle”), reckless
agents and an unsuspecting third party. A third party will make a decision while relying
on information from the agent. The principle will be held liable for the actions of his
agent.26 The theory points out that a deficit in management of a company arises as a result
23‘Global and Regional Trends in Corporate Governance for 2017’
<https://corpgov.law.harvard.edu/2017/01/06/global-and-regional-trends-in-corporate-governance-for-
2017/> accessed 20 April 2017. 24Andrea Beltratti, ‘The Complementarity between Corporate Governance and Corporate Social
Responsibility’ Vol. 30 Palgrave Macmillan Journals 373. 25Michael C Jensen and William H Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs
and Ownership Structuree’ (1976) 3 Journal of Financial Economics 305. 26Susan P Shapiro, ‘Agency Thoery’ 31 (2005) Annual Review of Sociology 263.
9
of separation of ownership and control.27 The agency problem is common in companies.
The agency relationship is important in that it makes possible the management of a
company where one party alone could not manage to run the company. The principle
stands to benefit the most out of an agency relationship. The agency problem arises where
the principle and the agent have diverging interests that are potentially detrimental to the
third party’s interests. In such a situation, the agent may opt to satisfy his personal
interests at the expense of the principle. The principle may be forced to monitor the
agents closely or stop using agents which will incur higher transaction costs. Either way,
agency costs are inherent in any agency relationship. The challenge in agency law arises
where the principle attempts to align the interests of the agent and those of the third
party.28 This theory is relevant to the study because it recognizes the role of corporate
governance practices in relation to directors protecting shareholders’ interests. This
research aims at establishing whether the Companies Act 2015 is sufficient in ensuring
compliance with corporate governance practices for the benefit of the stakeholders.
Corporate governance attempts to minimize divergence of interests of directors and
shareholders.
The stakeholder theory was first propounded in 1984 by R. Edward Freeman.29 It is
concerned with management and ethics within an organization. Values and morals are an
intrinsic part of management of companies.30 The theory rejects the separation theory
which states that ethics and economics can be separated.31 It aims at achieving
27William W Bratton, ‘Private Equity’s Three Lessons for Agency Theory’ 3 Brooklyn Journal of Corporate,
Financial and Commercial Law 1. 28Thomas A Simpson, ‘A Comment on an Inherently Flawed Concept: Why the Restatement (Third) of
Agency Should Not Include the Doctrine of Inherent Agency Power’ (2005) 57 Alabama Law Review
1163. 29Stephen L Larson, ‘Stewardship Theory, Stakeholder Theory and Convergence’. 30Robert Phillips, R Edward Freeman and Andrew C Wicks, ‘What Stakeholder Theory Is Not’ (2003) 13
Cambridge University Press 479. 31R Edward Freeman, Andrew C Wicks and Bidhan Parmar, ‘Stakeholder Theory and “The Corporate
Objective Revisited”’ (2004) 15 INFORMS 364.
10
distributive justice in a capitalist state where companies are expected to take up
obligations beyond those they owe to shareholders. The success of any company is
determined by various factors besides shareholder wealth.
A stakeholder is defined as a person or group of people with an interest in the company. A
stakeholder could also be a group of people who are affected by the actions or policies of
a company. Usually, stakeholders comprise of suppliers, unions, government, and
environment, among others. Stakeholders are separate from the primary shareholders with
monetary investment in the company. Milton Friedman states that directors of any
company should be cognizant of the stakeholders concerned.32 During the Enron trial, the
inclination of judges and juries towards consideration of the extent of harm on
stakeholders is proof that maximization of shareholder wealth is fictitious. At the peak of
corporate hubris such as Enron at the beginning of the 21st century, there was low public
tolerance on mismanagement of company affairs by directors.33
The stakeholder theory is relevant to this study as it identifies with the current trends in
corporate governance. It acknowledges that companies have obligations towards society.
The sustainability of any company depends on how it interacts with the society in which
it operates. The primary objective of any company cannot be to maximize on profit.
1.5.2 Literature Review
This research will be founded on the various articles and books written on corporate
governance. This research will analyze the following various articles to identify the
loopholes in the law which constitute the focus of the study.
32Andrea Corfield, ‘The Stakeholder Theory and Its Future in Australian Corporate Governance’ (1998) 10
Bond Law Review Article 5. 33Russell Powell, ‘The Enron Trial Drama: A New Case for Stakeholder Theory’ (2007) 38 University of
Toledo Law Review.
11
In A Review of Corporate Governance in Africa: Literature, Issues and Challenges,
Charles C. Okeahalam and Oludele A. Akinboade highlight some of the challenges
weighing down corporate governance in Africa. Some of the challenges include:
predominance of family owned businesses, informal business set ups, political
interference and poor composition of boards.34
This report presents an African case for corporate governance and the challenges thereof.
However, this research paper will investigate the Kenyan case for corporate governance
and draw conclusions for the specific challenges in the Kenyan context.
Peter Onyango Onyoyo investigates ethical underpinnings in business today.35 He looks
into business and the rule of law. He states that there is need for certainty in the business
environment to ensure the rule of law prevails. For the rule of law to be enforced, he
highlights the need for institutions and mechanisms to enforce the law. Apart from
legislative reforms, ethics form an integral part in any legal system. He states that
corruption in Kenya is a social vice that is encouraged by the political environment. He
highlights the failure of various institutions that have failed in their mandate to handle
unethical conduct in public officials. He attributes the lack of ethics in business to the
attitude by the elite as the cause of the rot.36
Peter highlights business ethics as an important aspect of any community. He takes a
general approach in his research. He investigates public institutions and the gatekeepers
of ethical conduct which include statutes and the various bodies tasked to ensure ethical
conduct among officials. His article is recent and is well informed on the trends in the
34Charles C Okeahalam and Oludele A Akinboade, ‘A Review of Corporate Governance in Africa:
Literature, Issues and Challenges’ (2003)
<https://www.researchgate.net/publication/237256378_A_Review_of_Corporate_Governance_in_Afric
a_Literature_Issues_and_Challenges> accessed 29 May 2017. 35Peter Onyango Onyoyo, ‘Governance Ethics and Business: Kenyan Growing Economy at Cross-Road in
the 21st Century’ (2015) 3 Advances in Economics and Business 70. 36ibid.
12
business community and the factors influencing corporate culture in Kenya. However,
this research will be specific to investigate both public and private companies and the
specific statutes concerned with corporate governance in the sector.
Edward, Andrew and Freeman made arguments to clarify the misconceptions of the
stakeholder theory.37 They are of the school of thought that it is difficult to separate
business and ethics. In defining stakeholder theory, one must consider the primary
objective of the business and the role of directors. Directors should aim at making
communities contribute towards achieving the company’s objectives. They argue that
making profits is central in any company. However, making profits should not be the only
cause of motivation to achieve the company’s goals. In their view, having only one
driving objective for the company makes management difficult. They argue that creating
value for shareholders is directly linked to creating value for stakeholders. Companies
may opt for stakeholder maximization in order to avoid the consequences imposed by
law. Ultimately, it is in the best interest of any company to produce good quality products
or services and establish good relationships with suppliers.38
Kiarie Mwaura is of the view that directors often abuse the veil of incorporation when
they disregard human rights.39 They often escape liability in tort and human rights by
virtue of incorporation. States are obliged to protect human rights by virtue of
international law. In this regard, governments play an important role in preventing abuse
of human rights by companies. Most states have adopted legislation to prevent such
abuse. He opines that companies owe a duty to the society at large and legislative reforms
37Freeman, Wicks and Parmar (n 31). 38ibid. 39Kiarie Mwaura, ‘Internalization of Costs to Corporate Groups: Part-Whole Relationships, Human Rights
Norms and the Futility of the Corporate Veil’ 11 Journal of International Business and Law.
13
are necessary towards enforcement of this duty.40
Kiarie Mwaura,41 states that the integration of economies in the world through
globalization demands higher standards of care and skill of directors. Despite the benefits
derived from globalization, there are some challenges associated with it. For instance, the
diversification of office locations has made it difficult for shareholders to make decisions
as they are unable to keep up with the operations of every office. Governments are under
more pressure to create a favorable environment for investment in order to attract both
foreign and local investors. The difficulty in applying common law is the inaccessibility
of the case law. Common law is not modified to appreciate the current market
environment.42
Judy N Muthuri and Victoria Gilbert in An Institutional Analysis of Corporate Social
Responsibility in Kenya, examine the different forms of Corporate Social Responsibility
(CSR) policies and practices in Kenya.43 They highlight that most literature on CSR is
based on western and transitional countries. From such literature, they are of the view that
some of the recommendations made are not in the best interests of developing states. An
‘Africanized’ CSR agenda is necessary. Their research is geographically contextualized to
Kenya from which they have drawn conclusions on the determinants of CSR.
Determinants of CSR from this article include: normative presuppositions (social
pressure), cultural presuppositions (cultural expectations) and the capacity of the
government to enforce the regulatory framework on CSR.44 Their research is enriched
with comprehensive fieldwork on the Kenyan business sector.
40ibid. 41Kiarie Mwaura, ‘Company Directors’ Duty of Skill and Care: A Need for Reform’ (2003) 24 Company
Lawyer 283. 42ibid. 43Judy N Muthuri and Victoria Gilbert, ‘An Institutional Analysis of Corporate Social Responsibility in
Kenya’ (2011) 98 Journal of Business Ethics 467. 44ibid.
14
The above articles are in agreement that CSR is a separate agenda from the company’s
core business. They acknowledge the role of CSR in any community. However, they do
not sufficiently appreciate the role of the regulatory framework in enhancing corporate
governance standards in Kenya. This research will illustrate the enforcement mechanisms
in place in ensuring compliance and the challenges that stifle efficiency of the legislative
framework. It will then illustrate the correlation between CSR and performance of
companies.
Similarly, Lois M. Musikali,45states that the poor corporate governance structure in Kenya
is as a result of a poor regulatory framework and political influence. She identifies the
case of Uchumi Supermarkets where shareholder activism played an important role in
pursuing the government to step in and resuscitate the business. She notes that the
legislative framework should be tailored to the environment within which it operates. She
opines that Kenya is unable to establish a good corporate governance enforcement
mechanism. She blames the state of affairs on a legislative system tailored for markets
with a strong legal system and different corporate cultures compared to Kenya.46
This research concurs with Lois, however, this research will delve into a comparative
study of the corporate governance legislative framework in other jurisdictions and draw
lessons from which Kenya can adopt.
Jacob K. Gakeri appreciates the importance of corporate governance in the securities
market. He identifies the challenges and opportunities in enhancing the securities market
in Kenya.47 He attributes the weak corporate governance system in Kenya to the weak
legal framework, failure of the Capital Markets Authority to enforce the Guidelines for
45M. Musikali (n 5). 46ibid. 47Gakeri (n 20).
15
Public Listed Companies and the lack of a corporate culture that upholds corporate
governance. The Companies Act fails to recognize the mandate of non-executive
directors, external auditors, duties of directors and shareholder rights. He is of the view
that the Companies Act appreciates a shareholder maximization approach. He states that
compliance with the corporate governance guidelines has taken a comply or explain
approach. This approach creates a vacuum whereby companies as well as their directors
are likely to escape liability. The soft approach to compliance is the underlying cause of
several company scandals. In addition, the Guidelines do not emphasize the necessity of
training of directors which ideally should be essential to nurture corporate governance.
He recommends that the hardening of corporate governance principles may be a
necessary step like in the United States where the Sarbanes-Oxley Act 2002 was passed.48
This article underpins the basis of this research by pointing out the weaknesses in the
legislative framework. However, it is important to note that this article was written in
2013 before the enactment of the Companies Act 2015. This research will illustrate the
changes introduced by the statute and how they have enhanced corporate governance
standards.
Eric Ernest investigates the relationship between corporate governance and ownership
structures in relation to performance in the banking sector in Kenya.49 He appreciates that
the corporate governance movement in Kenya has gained momentum due to the progress
made in sustainable development. He attributes poor governance of banks on poor
corporate governance practices, poor management structures, conflict of interest and
weak regulatory structures. He commends banks with an independent board where the
CEO does not sit as a chairperson stating that from research, such banks perform better
48ibid. 49Eric Ernest Mang’unyi, ‘Ownership Structure and Corporate Governance and Its Effects on Performance:
A Case of Selected Banks In Kenya’ (2001) 2 International Journal of Business Administration.
16
and firm value is enhanced. He attributes the progress made in the banking sector to the
regulations and guidelines put in place through the CBK. Further, he states that the
regulations in place enhanced the supervisory role of CBK. These regulations also
emphasize the importance of the role of the board of directors as well as non-executive
directors.50
Kiarie Mwaura in ‘The Failure of Corporate Governance in State Owned Enterprises and
the Need for Restructured Governance in Fully and Partially Privatized Enterprises: The
Case of Kenya,’ presents the case of parastatals in Kenya. He outlines the history in
development of State Owned Enterprises and the challenges that influenced legislative
reforms towards good corporate governance practices. He advocates for the streamlining
of legislation governing State Owned Enterprises since the overlapping statutes only pose
as a challenge in their management.51
As much as the authors of these articles present a viable case for the banking sector and
State Owned Enterprises, they fail to demonstrate how other sectors may benefit from
borrowing from the developments in legislation of these sectors. An analysis of these
articles presented a knowledge gap that this research intends to fill. This research will
draw recommendations some of which shall be informed by the regulatory framework
governing corporate governance in the banking sector and parastatals.
1.6 Objectives of the Study
Main Objective
The main objective of this study is to establish whether the corporate governance
50ibid. 51Kiarie Mwaura, ‘The Failure of Corporate Governance in State Owned Enterprises and the Need for
Restructured Governance in Fully and Partially Privatized Enterprises: The Case of Kenya’ (2007) 31
Fordham International Law Journal 34.
17
regulatory framework as encompassed in the Companies Act 2015 is sufficient in
enforcing best corporate governance practices.
Specific objectives
1. To evaluate whether the Companies Act 2015 is sufficient in ensuring compliance to
corporate governance standards in the management of unlisted companies in Kenya.
2. To evaluate the extent to which the Companies Act 2015 promotes corporate
governance.
3. To interrogate what lessons Kenya can learn from best practices in other jurisdictions
with firm corporate governance regulatory frameworks.
1.7 Research Questions
The study will aim to answer the following questions:
1. What is the current status of the legislative framework for corporate governance in
Kenya?
2. Is the existing legislative framework effective in ensuring compliance with best
corporate governance practices?
3. What recommendations are necessary to make the legislative framework more
effective?
1.8 Hypothesis
The research is based on the following hypothesis:
1. The corporate governance legislative framework in Kenya is not effective in
ensuring compliance with good corporate governance practices.
18
2. There is need to have in place an effective enforcement mechanism to ensure
compliance with good corporate governance practices.
1.9 Research Methodology
This study shall be doctrinal and empirical.
1.9.1 Doctrinal Approach
The doctrinal approach will make use of the library services where relevant materials
from books, scholarly articles, case law, newspaper articles, reports and internet sources
on the subject will be used to support the arguments made in the study. These literature
materials will be sourced from the University of Nairobi Parklands Campus library.
Taking cognizance that the University might not be able to stock all the recent
publications touching on the subject, the study will resort to online journals.
1.9.2 Empirical Approach
The empirical approach will complement the doctrinal approach by assisting in data
collection through questionnaires administered to advocates, scholars and other persons
that have experience in corporate governance. Data from the informants will include their
experience and challenges they have encountered in ensuring that corporate governance is
upheld in so far as the public and private companies are concerned.
The purposive sampling method will be used such that the sample members will be
selected based on their knowledge and expertise on the research subject. For this study,
the research instrument used is the questionnaire. The questionnaire is divided into four
sections; Section A will collect the general information on the respondents, Section B will
collect information on the knowledge of respondents on the legislative reforms on
corporate governance introduced by the Companies Act 2015, Section C will collect
information on the gaps in the Companies Act 2015 on corporate governance and Section
19
D will collect information on lessons Kenya can learn from other jurisdictions on
enhancing the corporate governance framework.
The validity of the questionnaire was tested through a pilot study which involved seeking
the opinion of scholars and other professionals on the instrument’s adequacy in achieving
the objectives of the study.
The data will be subjected to a quantitative analysis. A regression analysis will be used to
establish the relationship between the legislative framework and corporate governance.
Finally, the doctrinal and empirical research done on the study will be used to draw
conclusions and recommendations.
20
1.10 Chapter Breakdown
Chapter One: Introduction
This chapter lays out the background to the study. It proceeds to identify the justification
of the research and rolls it up into a statement of the problem. The chapter also outlines
the theoretical framework, research objective and research questions. It serves as a brief
summary of the research.
Chapter Two: Review of the Legislative Framework on Corporate Governance
This chapter shall look into the regulatory framework on corporate governance in Kenya
that governs both listed companies and unlisted companies. The loopholes within the
Companies Act 2015 shall be discussed.
Chapter Three: Best Corporate Governance Practices: Lessons from the United
States of America and South Africa
This chapter addresses the loopholes identified in the previous chapter by identifying best
corporate governance practices in other jurisdictions. The lessons drawn from those
jurisdictions shall serve as a case study from which Kenya can borrow lessons to fill in
the gaps in its legislative framework. This chapter shall also discuss proposed legislation
and its ability to address the identified loopholes.
Chapter Four: Gaps in the Legislative Framework on Corporate Governance
This chapter presents the findings of a survey conducted on the challenges experienced by
advocates, scholars and other persons experienced in corporate governance on the gaps in
corporate governance regulatory framework in Kenya. The survey identifies other issues
to be considered while taking into account the recommendations for reform.
Chapter Five: Summary of Findings, Conclusion and Recommendations
This chapter sums up the study and gives recommendations for reform.
21
CHAPTER TWO: REVIEW OF THE LEGISLATIVE FRAMEWORK ON
CORPORATE GOVERNANCE IN KENYA
2.1 Introduction
Corporate governance refers to the way companies are managed internally. Good
corporate governance requires that stakeholder interests are considered. The government
and cultural diversity play an important role in shaping the corporate governance
regulatory framework.52 Cultural diversity influences the values of the management in a
company.53 Hence, the legislative framework should suit the needs of the market in which
it operates.
This chapter investigates the corporate governance regulatory framework in Kenya. It will
identify the constitutional basis of corporate governance from the Constitution 2010. It
will then investigate subsidiary regulation on corporate governance for listed companies
that is, the Capital Markets Act, Code of Corporate Governance Practices for Issuers of
Securities to the Public 2015 and NSE Market Participants (Business Conduct and
Enforcement) Rules, 2014. It will also review proposed legislation such as the Companies
Amendment Bill 2017 and Companies (General) Amendment Regulations 2017,54 which
are intended to amend some provisions of the Companies Act 2015 (the Act).55
However, the proposed amendments to the Act do not cure the weaknesses of the Act
which include: Lack of a firm approach to declaration of interest by directors; Lack of
recognition on the role of non-executive directors; Ambiguity in the definition of small
companies’ regime; Lack of a financial reporting standard and Lack of a guideline on
52 ‘OECD PRINCIPLES OF CORPORATE GOVERNANCE -
Http://Www.oecd.org/Officialdocuments/Publicdisplaydocumentpdf/?cote=C/MIN(99)6&docLanguage
=En’
<http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=C/MIN(99)6&docLanguage=
En> accessed 5 June 2017. 53 Michael H Lubetsky, ‘Cultural Difference and Corporate Governance’ (2008) 17 Transnational Law and
Contemporary Problems 187. 54 Companies Act 2015. Section 659 55 Companies Amendment Act 2017 2017.
22
directors’ remuneration report.
The chapter is keen on investigating the ability of the Act to ensure companies’
compliance with corporate governance standards.
Chapter Three shall attempt to fill the identified gaps in the Kenyan context by
identifying best practices in the USA and South Africa. Chapter Three tries to strike a
balance in order to strengthen the enforcement mechanism within the Kenyan context.
2.2 The legislative framework on corporate governance in Kenya
2.2.1 The Constitution of Kenya 2010
The Constitution is the supreme law and is binding to both natural and artificial persons.
Other enacted laws are required to uphold the spirit of the Constitution.56 Further, all
persons are mandated to uphold the Constitution.57 Companies are artificial persons
created by the law and are equally required to uphold the Constitution.
The pillars of corporate governance include rule of law, fairness, transparency and
accountability.58
The rule of law is a principle denotes that nobody is above the law. The law is to be
applied equally to all persons. Therefore, transparency and equality must be exercised
when applying the law.59 The principle of the rule of law is rooted in the Constitution
2010.
Transparency International defines transparency as a principle that helps understand facts
and mechanisms/processes used to make business decisions and transactions. Leaders are
56 The Constitution of Kenya 2010. Article 2 57 ibid. Article 3 58 ‘Report of the Committee on the Financial Aspects of Corporate Governance’ (1992). (Cadbury Report) 59 ‘The Rule of Law - LexisNexis’ <https://www.lexisnexis.com/en-us/rule-of-law/default.page> accessed
10 July 2017.
23
required to act predictably. It encourages stakeholders to have confidence in the
management system. Transparency goes hand in hand with integrity.60 Reforms in
corporate governance are inclined to increase transparency by companies.
Accountability is an aspect of governance that makes it possible for the actions of public
officials to be reviewed to ensure that they meet their objectives. It evaluates the
effectiveness of public bodies in meeting the needs of the public.61 Accountability can be
achieved through financial or sustainability reporting.
Fairness in corporate governance is mostly aimed at the treatment of shareholders.
Company affairs should be carried out having considered the interests of all shareholders.
Information should be communicated to shareholders in a timely fashion to enable them
to participate in decision making.62
These pillars of good corporate governance are enshrined in the Constitution 2010 and
more specifically under Article 10 which provides for the national values. The national
values are binding on all persons who may need to apply, enact or interpret any
legislation.63 Hence, companies are bound by this provision as they are bound by the
various legislations such as the Bill of Rights in the Constitution in regards to treatment
of their employees, the Companies Act which serves as the primary legislation for all
companies in Kenya, employment laws such as the Employment Act, Work Injury
Benefits Act, among others.
60 ‘Transparency in Corporate Governance’
<https://economybuilding.wordpress.com/2011/03/02/transpanrency-in-corporate-governance/>
accessed 6 June 2017. 61 ‘Accountability Governance’
<https://siteresources.worldbank.org/PUBLICSECTORANDGOVERNANCE/Resources/Accountability
Governance.pdf> accessed 6 June 2017. 62 Patrick Gitau, ‘The Pillars of Good Corporate Governance’ (LinkedIn Pulse, 27 July 2015)
<https://www.linkedin.com/pulse/pillars-good-corporate-governance-patrick> accessed 10 July 2017. 63 Article 10(1) (b)
24
The national values as per the Constitution include rule of law, the participation of the
people, human dignity, equality, good governance, transparency, accountability and
inclusiveness, just to mention a few.64 These national values are essential where reforms
are to be introduced to enhance the efficiency of the legislative framework. These
principles have been replicated in the Companies Act 2015 to incorporate good corporate
governance.
2.2.2 Capital Markets Act
The Capital Markets Act Cap 485A was enacted mainly to promote, regulate and facilitate
the growth of fair capital markets. The Capital Markets Authority (the “Authority”) is
established under Section 5. It is mandated to ensure that there exists a favourable market
for long-term investments. It regulates the securities market and expects that market
players regulate themselves to promote fair trade. It is particularly interested in protecting
investors’ interests. It is charged with licensing the capital markets in Kenya. In meeting
its objectives, the Authority may impose penalties on entities for breach of its directions.
The provisions of this legislation right from its preamble incorporate the pillars of
corporate governance.
The Authority is capable of issuing include financial penalties. For example, Faida
Investment Bank was fined Kshs. 7,000,000 for overdrawing clients’ accounts and not
giving accurate accounts which were a breach of the regulations in place, East Africa
Portland Cement Company was fined a sum of Kshs. 50,000 for failure to disclose to the
Authority material changes in its board of directors and Centum Investments was fined
Kshs. 50,000 for failure to issue a warning on its profits where its earnings fell by over
25%.65 The Authority also has the power to suspend a company from listing on the NSE
64 Article 10(2)(a)(b)(c) 65 By James Anyanzwa, ‘Capital Markets Authority Reigns in on Rogue Firms’ (The Standard)
25
like in the case of Uchumi Supermarkets Ltd.66 Other penalties include requiring that an
entity compensates the aggrieved party or even publishing miscreant behavior found to be
orchestrated by entities falling under the capital markets or suspension of the listing
and/or trading of securities.67
The Authority in meeting its objectives may consult with the Minister of Finance to issue
guidelines and regulations to assist in regulating capital markets. However, proposed
regulations should be subject to review and participation of relevant stakeholders. The
regulations may be concerning the listing of securities, disclosure of transactions, rules
for bookkeeping and regulations for foreign investors in the securities market, use of
funds raised through securities, among others.68 Examples of regulations the Authority
has issued include Licensing Requirements General Regulations, Take over and Mergers
Regulations, Corporate Governance Guidelines, Capital Markets Securities Public Offers
Listing and Disclosure and the most recent one being Codes of Corporate Governance
Practices for Issuers of Securities to the Public.69
By the powers conferred upon the Authority under Section 11(3) (v) and 12 of the Act, it
issued a Code of Corporate Governance Practices for Issuers of Securities to the Public
2015 (Code 2015) to succeed the Codes of Corporate Governance Practices for Public
Listed Companies 2002 (Code 2002).70 The Code 2015 is to be applied by listed and
unlisted public companies. The move is in response to the increased concern over
corporate governance issues and the progress made in various countries in regulating
<https://www.standardmedia.co.ke/article/2000084387/capital-markets-authority-reigns-in-on-rogue-
firms> accessed 27 June 2017. 66 Administrator, ‘Uchumi Supermarkets - Your Home of Value’ (Uchumi Supermarkets - Your Home of
Value) <http://kenya.uchumicorporate.co.ke> accessed 10 April 2017. 67 Capital Markets Act (n 13). Section 11 68 Section 12 69 ‘Capital Markets Authority - Nairobi Securities Exchange (NSE)’ <https://www.nse.co.ke/regulatory-
framework/capital-markets-authority.html> accessed 27 June 2017. 70 Code of Corporate Governance Practices for Issuers of Securities to the Public.
26
companies’ governance issues. The Code 2002 was focused on self-regulation
mechanisms in companies. It also had a prescriptive and non-prescriptive approach to
allow flexibility in companies.71 The Code 2015, on the other hand, moves away from
merely setting minimum standards for corporate governance. Instead, it tries to achieve
full compliance with best practices. It applies specifically to chief executive officers,
directors, shareholders and the management in companies. It adopts an Apply or Explain
approach which requires that companies fully comply with the code. This is a move from
the Comply or Explain approach that was in the former code. Non-compliance is only
excused in specific circumstances. Companies are required to disclose non-compliance
and make a commitment towards compliance. It sets minimum standards for structures
and processes to which companies must comply with.
Transparency and disclosure of information play an important role in corporate
governance. These principles are provided for in the Code 2015 under Chapter 7. These
principles discourage the unethical practice, enhance investor confidence and help the
public understand the company’s core business. Transparency can be achieved through
publishing the company’s objectives, its directors, financial reports, implementation of a
whistleblowing policy, among others. 72
The Capital Markets Act emphasizes the role of the board of directors in Chapter 2 of the
Code 2015. The board of directors is key to the company’s corporate governance agenda
for the benefit of shareholders and other stakeholders. Shareholders’ rights are provided
for in Chapters 3 and 4 of the Code 2015. The provisions on the board of directors,
shareholder relations, corporate citizenship and the accounting function of companies
shall be discussed further in the following section of this chapter.
71 Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya. 72 Code of Corporate Governance Practices for Issuers of Securities to the Public (n 70).
27
a) Board Operations and Control
Chapter 2 of the Code 2015 provides for the board of directors which is key in corporate
governance. It requires that the appointment of boards of directors be a transparent
procedure. The procedure should be documented in order to account to shareholders.
Potential candidates for appointment are required to declare any conflict of interest. It is
the Nomination Committee that is tasked with selecting the directors. Upon appointment,
formal appointment letters are to be issued setting out the terms of appointment. The
board of directors should be comprised of both executive and non-executive directors.
The size and composition of the board are important in ensuring that the company’s
business objectives are met. Hence, diversity in the board composition is essential.
Selected directors can only hold a maximum of three directorships in public listed
companies. Diversity in the board of directors creates a balance in skills, experience and
independence for the benefit of the company’s business.
The board of directors is accountable to the company’s shareholders. It is under a duty to
offer strategic guidance to the company to benefit the interests concerned. The
chairperson of the board should not be the CEO but a non-executive director. This is the
position as the chairperson is tasked with overseeing the company’s affairs on a daily
basis.
The independence of any board is imperative to its judgment in making decisions. The
Code 2015 requires that the independence of the board of directors be assessed annually.
This is aimed at quelling risks of conflict of interest and undue influence from external
parties. Similarly, the board of directors is to be inducted into the company and receive
training from time to time to enhance good corporate governance in the business
28
environment. Along with the training, the effectiveness of the board of directors, CEO
and company secretary is to be evaluated. Recommendations are proposed for the
shortcomings identified. Further, a governance audit is to be conducted annually to check
whether the company is operating on good corporate governance standards. The audit is
to be conducted by a professional accredited by ICPAK. The audit is to cover
transparency, accountability to stakeholders, independence of the board of directors,
board procedures, compliance with the law, leadership and CSR. At the end of the audit,
the Code 2015 requires that a statement be issued commenting on the level of
compliance.73
b) Shareholder and Stakeholder Relations
Shareholder rights are an important aspect of corporate governance. Without a sound
regulatory framework, investors may be discouraged from investing. Therefore,
companies have to consider this aspect when raising capital from the public. The board
should ensure that it facilitates for shareholders to exercise their rights efficiently. For
instance, the board should consider the expense and convenience for shareholders while
selecting a venue for the annual general meeting.
Shareholders’ rights are provided for under Chapter 3 of the Code 2015. They are
premised on the right to information on the company, to vote, to participate in the general
meetings, to transfer their shares and to share in the company’s profits. The board in
facilitating shareholders’ rights is under a duty to communicate to them on the details for
them to attend the general meetings and to ensure maximum participation. In addition, the
board should establish an effective communication policy to ensure that shareholders stay
up to date. Finally, the board should ensure equitable treatment of shareholders.
73 ibid.
29
The Code 2015 under Chapter 4 provides that board of directors should adopt a
stakeholder approach in management of the company’s affairs. Corporate governance is
equally concerned with stakeholder interests. However, in doing so, the board is to be
guided by the principle that the company’s interests take precedence. The aim of this
approach is to establish reciprocating trust and respect between the company and
stakeholders. In this regard, relevant information is to be availed to stakeholders but only
if it is to the best interests of the company.74
c) Corporate Citizenship
The Code 2015 advocates for corporate social responsibility under Chapter 5. Companies
are encouraged to strive to respect the environment in which they operate. The board is
responsible for promoting exemplary ethical conduct among the company’s employees
and executive staff. The board is required to establish a code of conduct for this purpose.
This chapter is founded on Chapter Six of the Constitution 2010 that emphasizes integrity
in leadership. The company’s code of conduct should be integrated into the company’s
core business. The board should be seen to make decisions and operate ethically. A
company’s bad reputation may have financial implications.
d) Accountability and Internal Controls
Chapter 6 of the Code 2015 requires the board of directors to have in place internal
control systems. The controls should be keen on enhancing the company’s effectiveness,
sound financial reporting and compliance with laws and regulations.
The company’s financial reports should present an accurate account of the company’s
state of affairs. The audit committee should ensure that the reports are indeed reliable. An
external auditor should give a statement regarding the audit process. The board is fully
74 ibid.
30
responsible for the financial reports. To achieve objectivity in financial reporting, the
board is required to rotate the auditors after some years.
This is to go hand in hand with a risk management and internal control systems. The
board should ensure the effectiveness of these control mechanisms. The audit function is
central to these controls. Unlike the Companies Act 2015, the Code 2015 recommends the
accounting standards to be utilized in the audit function.
2.2.3 Nairobi Securities Exchange (NSE) Regulations
The NSE was first registered as the Nairobi Stock Exchange under the Societies Act
(1954) and later changed its name to Nairobi Securities Exchange. The NSE is authorized
by CMA to give a trading platform for securities. It is also required to oversee the trading
companies.75 Even after companies meet the qualifications for listing on the NSE, they
are still required to observe some rules and regulations such as the NSE Market
Participants (Business Conduct and Enforcement) Rules, 2014.
These Rules are aimed at promoting transparency and fairness in the capital markets.
Listed companies are expected to enforce these rules on their employees. They are
binding and are intended to complement the guidelines issued by the CMA. The rules are
founded on the principles of integrity among company official to promote fair market
practices. Market participants are expected to practice fair market practices that involve
disclosing important information to shareholders and avoid conflict of interest. Further,
compliance with the statutory law is paramount to their being listed to trade. As far as
being listed is concerned, market participants owe a duty of care to their customers and
are expected to carry out their due diligence at all times. The Rules promote good
corporate governance practices as recommended by the CMA.
75 ‘History of NSE - Nairobi Securities Exchange (NSE)’ <https://www.nse.co.ke/nse/history-of-nse.html>
accessed 29 June 2017.
31
Chapters 3 of the Rules require that the Board of Directors appoint a disciplinary
committee to enforce the Rules enacted by the NSE. Chapter 4 of the Rules prescribes a
general code of conduct for market participants that are guided by the aforementioned
principles.76
2.2.4 The Companies Act 2015
The Companies Act 201577 (“The Act”) repealed the Companies Act Cap 486 which was
based on English Law. The Act in its preamble states that it was intended to consolidate
and reform Company law in regards to incorporation, operations and management of
companies.
The Act was significant as Kenya tries to become a regional commercial hub. Its
provisions acknowledge the role of technology in business today.78 Hence, it signifies a
step towards realizing modern company law although it borrows heavily from the
Companies Act 2006 of the United Kingdom.79 The Act creates a distinction between
public and private companies. The regulations governing public listed companies do not
apply to smaller companies. In this light, a small companies’ regime is created with the
aim to reduce operational costs for ‘small companies.’ The Act features heavier sanctions
as compared to the Companies Act 1948.80 The provisions incorporate both civil and
criminal sanctions. The sanctions comprise of disqualification of directors, general default
fines, and higher monetary fines to imprisonment terms.
The Act makes it possible for a company to be formed with a sole director and
recommends the minimum age for a director as 18years. Hence, documents executed by
76 Nairobi Securities Exchange Market Participants (Business Conduct and Enforcement) Rules. 77 Companies Act (n 9). 78 Sections 3, 272, 307, 840, 874 79 Harney (n 10). 80 Rosa Nduati-Mutero and Sheila Nyayieka, ‘What New Companies Act Means for Entrepreneurs’ (The
Standard) <https://www.standardmedia.co.ke/article/2000176942/what-new-companies-act-means-for-
entrepreneurs> accessed 11 July 2017.
32
one director are valid. Directors are now required to consent to their appointment as
director in writing while registering the company registration documents.
One of the most significant amendments to Company law in Kenya was the codification
of directors’ duties. These are based on common law. Initially, they were not codified
which gave room for abuse of power by directors under the pretence of the business
judgment rule. It is now possible to hold directors personally liable for breach of their
duties. A director may be disqualified to act as a director if they are convicted of an
offence, if in breach of their general duties or after an investigation and is found to be
unfit to act. Directors could only be disqualified if it is desired when company being
wound up.
As regards shareholder meetings and resolutions, private companies do not have to hold
an Annual General Meeting. However, they may still opt for them by making such
provision in their Articles of Association. Private companies have the power to hold
meetings on short notice if the shareholders’ consent to the same.
Another significant amendment to the companies’ regime is the regulation of takeovers,
mergers and amalgamations. In addition, companies are allowed to buy back their own
shares. Initially, these aspects of were not provided for in law.
The Act provides for more regulations to govern foreign companies. Regulations are in
place for companies incorporated outside Kenya that intend to be registered and conduct
business in Kenya. It creates a register for foreign companies. The Cabinet Secretary is
required to publish more regulations for this cause.81
The Act attempts to enhance corporate governance by requiring public companies and
81 Harney (n 10).
33
some private companies to have a company secretary. It further recognizes the role of
auditors in a company.82 Shareholders’ rights are better protected since the Act gives them
a better opportunity to participate in decision making. For example, fixed-term contracts
for directors and some transactions are subject to approval by shareholders. Through
these provisions, the Act breathes life into realizing good corporate governance
practices.83
The pillars of corporate governance as entrenched in the Constitution 2010 through the
national values form part of the Companies Act 2015.
The principle of the rule of law states that nobody is above the law. One of the significant
amendments introduced by the Act is the codification of directors’ common law duties.
Directors are mandated to act within their power as a director, to act within the best
interests of the company, to act independently while making decisions in regards to the
company, to manage company affairs with reasonable skill, to avoid conflict of interest
and not to accept gifts from third parties.84 This made it possible for directors to be held
accountable for breach of their general duties.85 A director may also be disqualified from
acting as a director of a company. A director may be disqualified for fraud, breach of duty,
upon findings after an investigation or if they are convicted of an offence.86 A
disqualification order bars a person from forming or managing a company in any
capacity.87 Further, directors are required to comply with the law. A company will not be
exempted from provisions of the law without just cause. These provisions ensure that
directors are not seen to be above the law and that they can be held liable for their actions.
82 ‘Summary of the Companies Act 2015 (Commencement)’ <https://capitaregistrars.co.ke/summary-of-the-
companies-act-2015-commencement/> accessed 20 June 2017. 83 ‘The Companies Act, 2015’ <http://www.oraro.co.ke/alert/the-companies-act-2015/> accessed 20 June
2017. 84 Sections 142-147 85 Section 148 86 Sections 214-218 87 Harney (n 10).
34
The concept of transparency is manifested in several ways in the Act. For example,
directors are required to declare an interest if any in existing transactions88 and some
transactions with directors are to be approved by shareholders.89 Further, shareholders of
a company are entitled to receive information on the company. Companies are under a
duty to communicate to shareholders information regarding the general meeting.
Shareholders have a right to participate in those general meetings and to request for the
company’s statements.
Companies are under a duty to file with the Registrar of Companies their financial reports
for every financial year. The financial reports should reflect a true statement of account
for the company.90 All documents filed at the Companies’ Registry are public documents
and the public can access them. This inherently promotes accountability in companies.
Another aspect of accountability is the requirement for companies to file with the
Registrar of Companies a director’s remuneration report and the contents of the report.
As a general rule, shareholders in companies are to be treated equitably depending on the
class of shares they hold in order to promote the fairness principle. Shareholders should
be given the opportunity to exercise their rights in the company. They have the right to
share in the profits of the company, to participate in company meetings and to request for
information on the company.
Despite the progress made, the Act is not without a few challenges in ensuring
compliance with good corporate governance practices. Some of the inadequacies of the
Act are discussed as follows.
88 Section 151 89 Section 155-179 90 Section 635, 636
35
2.3 Gaps Identified in the Companies Act 2015
2.3.1 Lack of a Firm Approach to Declaration of Interest by Directors
The Act made a significant step towards enhancing corporate governance where it
codifies director’s duties. Directors are under a duty to act in good faith and promote the
business of the company,91 to exercise independent judgment,92 to exercise a degree of
reasonable care and skill,93 to avoid conflict of interest94and not to accept any benefits
from third parties that may be prejudicial to the company.95 These duties are general as it
is not possible to anticipate the objectives of companies that may be incorporated in
various sectors. It would be up to the market players to define the conduct in such
companies.
A director may be said to have a conflict of interest if his relationship with another party
may cause him not to exercise sound business judgment.96 The Act refers to a conflict of
interest in conflict of interest and duties.
Where a director has an interest in a transaction where the company is involved, the Act
provides for a procedure through which the extent of the interest is to be declared. Notice
of interest may be given in hard copy or in electronic form if acceptable.97 Such notice
forms part of the proceedings in the next meeting of directors.98 Where the company has
already entered the transaction, the nature and extent of interest should be declared to the
directors and in the case of a public company, a declaration to be made to shareholders.
For a public company where the company has already entered into a transaction for an
ascertainable amount of goods or services, the declaration has to be made to the members
91 Companies Act (n 9). Section 143 92 ibid. Section 144 93 ibid. Section 145 94 ibid. Section 146 95 ibid. Section 147 96 Michael Davis, ‘Conflict of Interest Revisited’ 12 Business & Professional Ethics Journal. 97 Companies Act (n 9). Section 151 98 ibid. Section 152
36
at a general meeting. A director does not have to declare an interest where he is not aware
of the interest or transaction where the interest manifests.
The interest may be direct or indirect. The interest could be regarding property,
opportunity or information regardless of whether the company could benefit from it.
However, the Act states that a director will not be in breach of his fiduciary duty if the
situation is determined not to present a conflict of interest or if other directors authorize it.
The authorization can only be given if it is in line with the company’s constitution. The
authorization is only valid if the requirement on quorum is met at the meeting where the
matter is considered, that is, excluding the directors with a conflict of interest.99
However, the Act provides that it is not mandatory for a director to declare an interest if
the rest of the directors are already aware of it. This is a potential front for the rest of the
directors to exploit the interests of the rest of the shareholders.
The Act does not provide for the duration for which the register of interests should be
kept. It expressly states that directors have a duty to declare an interest but does not make
it mandatory for the register to be updated.
The Act fails where it does not anticipate the possibility of misleading declarations of
conflict of interest being made. Directors are not held liable if they made untrue
statements or if they were reckless in making the declarations. Where decisions are made
based on such declaration of interest that is to the detriment of concerned shareholders, it
becomes difficult to hold the directors liable.
Where a director declared an interest in a transaction and subsequently made a profit from
it, the Act does not require that the said benefits be accounted to the company. This
99 ibid. Section 146
37
loophole makes it possible for directors to make secret profits at the expense of the
company. In European and North American Railway Company v Poor,100 the Supreme
Judicial Court of Maine stated that the director of a company is under a duty to account
for secret profits he has made out of a transaction by him for the company with a third
party. This is due to the fiduciary duty they owe to shareholders. By virtue of the
fiduciary duty they owe shareholders, they should not make profits that are adverse to
them.
2.3.2 Lack of Recognition on the Role of Non-Executive Directors
The Cadbury Report emphasized the role of non-executive directors in reducing corporate
scandals. They provide a system of checks and balances on the management system of
any company.101
The Capital Markets Act recognizes the role of non-executive directors in the Code of
Corporate Governance Practices for Issuers of Securities to the Public 2015 (the Code).102
However, these statutes only regulate public listed companies and the Capital Markets.103
The Code requires that the Board through a committee reviews the skills and expertise of
executive and non-executive directors are reviewed annually. It further recommends that
the board should have a balance of executive and non-executive directors. It requires that
non-executive directors should be the majority.104
The Act, on the other hand, benefits small business enterprises such that they do not have
100 Seymour D Thompson, ‘The Liability of Directors and Other Officers and Agents of Corporations’
[1880] General Law Journal. 101 Colin Boyd, ‘Ethics and Corporate Governance: The Issues Raised by the Cadbury Report in the United
Kingdom’ 15 Journal of Business Ethics 173. 102 Code of Corporate Governance Practices for Issuers of Securities to the Public (n 70). 103 The Preamble of the Capital Markets Act states, “…An Act of Parliament to establish a Capital Markets
Authority for the purpose of promoting, regulating and facilitating the development of an orderly, fair and
efficient capital market in Kenya and for connected purposes…” 104 Code of Corporate Governance Practices for Issuers of Securities to the Public (n 70).
38
to incur high running costs. However, there is no provision requiring non-executive
directors in public or private companies with a substantially high-profit turnover or those
that ordinarily impact the lives of a large community. It fails to outline a self-regulation
mechanism within such companies and subsequently renders some communities
vulnerable.
2.3.3 Ambiguity in the Definition of Small Companies Regime
The Act creates a small companies regime that is to be applied to small companies. The
Act defines a small company as one which has a turnover of less than Kenya Shillings
Fifty Million (Kshs. 50,000,000/=), the total value of its assets according to its balance
sheet at the end of the year is not more than Kenya Shillings Twenty Million (Kshs.
20,000,000/=) and it does not have over fifty employees. For a company to qualify as a
small company, it has to satisfy at least two of the aforementioned qualifications.105 A
parent company could also qualify as a small company if the companies it heads are a
small group. The group still has to meet the qualifications of a small company.106
Companies exempted from the small companies’ regime include public companies, a
group company which a public company is a part of, a public listed company or someone
carrying out business in banking or insurance activities.107
The small companies’ regime impacts on financial reporting and auditing of companies
falling under this category. Small companies ultimately bear less cost in terms of
corporate governance. The Act exempts small companies from several requirements
imposed on other companies.
Small companies are exempted from being audited. They may issue abbreviated financial
105 Companies Act (n 9). Section 624 106 ibid. Section 625 107 ibid. Section 626
39
statements without necessarily including an auditor’s report. Their director’s report does
not have to state the amount to be paid as dividend or a review of the business stating the
challenges and risks it is facing.108 They also do not have to state the employee
numbers.109
The qualifications of a small company as well as the small companies’ regime impede
economic growth. For instance, financial institutions and shareholders that may want to
provide capital to small companies may require audited financial statements to assist them
to make a decision on whether or not the company is worth their investment.
Furthermore, Kenya Revenue Authority (KRA) requires reliable financial statements from
companies to enable it to assess the companies’ performance and tax obligations. A report
issued by ICPAK states that the exemption of “small companies” from auditing will
exempt at least sixty percent (60%) of companies in Kenya from audits.110 This puts
lending institutions at risk as they do not have a reliable source of information on a
company’s financial position before lending money. In addition, KRA assesses tax
obligations of companies based on audited financial statements. The exemption makes tax
evasion by companies easier and as a result, tax administration is made difficult. Tax
assessment appears to be done by business owners themselves. In the long run, there will
be lack of ethics in tax compliance. Business owners also run the risk of being unaware of
the sustainability of their businesses from a financial advisor or auditor.
There are no operational guidelines on the application of rules applying to small
companies. The provisions applying to small companies are likely to be wrongly
108 ibid. Section 655 109 ibid. Section 649 110 FCPA Fernandes Barasa, ‘ICPAK Position on Enactment of the Companies Bill 2015’
<https://www.icpak.com/wp-content/uploads/2015/11/Press-Release-ICPAK-Position-on-Enactment-of-
The-Companies-Bill-2015.pdf> accessed 13 June 2017.
40
construed or interpreted.
The Act requires companies to lodge financial reports with the Registrar.111 However,
there is no mechanism to verify the financial reports submitted by small companies. The
exemption of small companies from auditing makes it possible for them to file fraudulent
financial reports. This serves as an incentive for the once small companies to understate
their reports for them to continue incurring low running costs.
There is need for concise guidelines for small companies such as sole director companies
to prevent the abuse of the exemptions they are accorded and to protect stakeholders
2.3.4 Lack of a Financial Reporting Standard
Directors are under a duty to prepare the company’s financial statements, failure of which
they are liable for an offence.112 They may approve financial statements if they give a true
account of the company’s accounts.113 The contents of a financial statement are provided
for in the Act.114 These financial statements for each financial year are to be lodged with
the Registrar.115
The Act appears not to appreciate the role of financial accounting in corporate
governance. The key elements of financial reporting include recording transactions from
financial records, summarizing records, preparing financial statements and auditing of the
reports. These are mostly accounting functions. The audit function over the years has
been regulated by professional bodies and other entities globally. Poorly financial
reporting standards or lack thereof threaten the ability to rely on financial statements.
International efforts towards setting accounting standards have seen to the enforcement of
111 Companies Act (n 9). Section 688 112 Section 635 113 Section 636 114 Section 638 115 Section 683
41
higher standards in financial reporting. This was particularly after the collapse of Enron
which raised questions as to whether the auditing standards at the time were sufficient and
whether legislative measures could reduce the probability of financial scandals in
companies.116
Financial reporting plays an important role in enhancing corporate governance. Corporate
governance advocates for disclosure to promote transparency in companies. Financial
reports should be subject to rules and audit. They help evaluate the performance of
directors with the main objective being to mitigate the agency problem. It helps
streamline the various interests concerned.117 However, the Act does not recommend a
uniform accounting standard for companies. The setting of accounting standards has
gained cognizance around the world due to the many benefits that result from it, for
example, the International Financial Reporting Standards (IFRS).118
A uniform financial accounting standard for the companies’ regime would make it easier
to compare accounting records between countries. It would make it easier to interpret
accounting records. Such a move would make fraud easier to detect.119 Companies would
be under pressure as their performance can be easily evaluated based on the disclosure
made on their financial statements. Stakeholders would find it easier to determine the
efficiency of company directors in discharging their duties. However, without setting
accounting standards, it is possible that the disclosure made is inadequate. Hence, the
116 Stanley Siegel, ‘Global Accounting Dimensions of Corporate Governance’ 7 Studies in International
Financial, Economic, and Technology Law 49. 117 Niuosha Khosravi Samani, ‘Financial Reporting and Corporate Governance – Essays on the Contracting
Role of Accounting and the E Ff Ects of Monitoring Mechanisms’ (University of Gothenburg 2015)
<https://gupea.ub.gu.se/bitstream/2077/37904/1/gupea_2077_37904_1.pdf> accessed 20 June 2017. 118 Robert W Holthausen, ‘Accounting Standards, Financial Reporting Outcomes, and Enforcement’ (2009)
47 Journal of Accounting Research 447. 119 ‘On the Global Acceptance of IAS/IFRS Accounting Standards: The Logic and Implications of the
Principles-Based System - BEF-005.pdf’ <http://www.observatorioifrs.cl/archivos/05%20-
%20Bibliograf%EDa/03%20-%20EF/BEF-005.pdf> accessed 21 June 2017.
42
purpose of the disclosure is not achieved.120
2.3.5 Lack of a Guideline on Directors’ Remuneration Report
The Act requires that directors of a listed company prepare and lodge a director’s
remuneration report (“the Report”) for every financial year. If the provision is not
complied with, the director is liable for a fine of a maximum of Kenya Shillings One
Million or incarceration for a maximum term of three years or both.121 The Act provides
that regulations will provide the contents of the Report.122 The report is to be approved by
the directors and circulated together with the company’s financial statement. The persons
to whom the Report should be delivered include shareholders, debenture-holders and
persons entitled to receive notice of general meetings.123
This is one of the most ambiguous provisions in the Act. Currently, there are no
regulations in place defining the contents of the Report, the reporting standard for the
Report and whether the Report is subject to audit. This ultimately creates a vacuum in the
guiding principles of reporting directors’ remuneration. Further, the Act does not require
that companies have in place a policy for directors’ remuneration. The policy should be
consistent with the director’s contract of service sufficiently stating the benefits to which
the director is entitled to such as share options, salary, bonuses, among others. Further, the
Report can only serve its purposive function if it is subject to audit and approval by
shareholders. Where a significant number of shareholders are opposed to the report, the
directors concerned should address their concerns.
In addition, the report should contain information on remuneration to the company’s
120 ‘Corporate Governance and Accounting Standards ... - unpan023821.pdf’
<http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023821.pdf> accessed 21 June
2017. 121 Section 659 122 Section 660 123 Section 662
43
previous directors that did not serve in that financial year. Similarly, it should state where
substantial compensation was given to anybody who did not serve as a director in the
financial year in question. An explanation should be availed to shareholders that may
have concerns over such awards.124
The purpose of the directors’ remuneration report is to ensure disclosure of material
information on benefits that may accrue to a director by virtue of their position in the
company. It aims at achieving transparency and accountability to portray good corporate
governance practices. However, the Act appears to take a back seat through the ambiguity
of this provision. This provision is likely to be abused by miscreant directors who would
prefer to conceal their remuneration in an attempt to swindle shareholders.
2.4 Attempts at Legislative Reforms
The Cabinet Secretary by virtue of Section 1022 of the Companies Act 2015 (‘the Act’),
has the power to make regulations towards the enforcement of the Act. The regulations
may appoint a body to impose reporting standards, documents lodged with the Registrar
of Companies, requirements for documents to be lodged, allocation of identification
numbers for companies, requirements for forms or to impose offences for non-compliance
with provisions of the Act. Issued regulations may be applied generally or specifically.
So far so good, the Attorney General has invited comments from the legal fraternity on
the Companies (General) Amendment Regulations 2017. These regulations are to affect
Section 659 of the Act which requires companies to lodge directors’ remuneration reports
annually. However, it has not been enacted.
2.4.1 The Companies Amendment Act 2017 (‘the Amendment’)
This Amendment was to amend the Companies Act 2015 (‘the Act’). In its Statement of
124 Companies (General) Amendment Regulations 2017 Yet to be enacted.
44
Objectives, the Amendment tries to ensure the Act complies with best practices. It
attempts to erase some loopholes in the Act. It enhances the provisions on the liability of
directors and the extent of disclosure expected of them. As a result, there will be
enhanced measures to protect minority shareholders.
The Amendment affects Section 146 of the Act which provides for the duty of a director
to avoid conflicts of interest. It holds directors liable if they or their family has a personal
interest in a transaction. It bars directors from receiving any form of gifts or benefits due
to their directorship position. Similarly, directors will be barred from receiving gifts from
third parties attributed to their actions or omissions while in office. This amendment does
away with the exemption provided for in the Act where directors are allowed to receive
such benefits so long as they are unlikely to cause a conflict of interest. The Amendment
provides that such directors will be guilty of an offence to which they are liable for a
monetary fine and, or conviction.
The Act requires for the documentation of a director’s family. The Amendment requires
the documentation of a director’s extended family such as in-laws, brothers and sisters as
well as their spouses. This is aimed at giving effect to the aforementioned provision
which holds directors liable for their family’s actions that negatively impact the company.
The Amendment invests heavily in transparency and requires directors to disclose other
directorships they hold.
Section 151 of the Act makes an exemption for directors on the declaration of interest.125
It provides that directors do not have to declare an interest where they are not aware of its
existence. The Amendment deletes this provision. Directors will then be held liable for
failure to declare an interest on grounds that they were not aware of the existence of such
125 Companies Act (n 9).
45
interest.
Companies are required to keep records of its proceedings for 10 years. The Amendment
amends this provision by providing that records be kept for at least 7 years. However,
directors who fail to observe this requirement will be held liable for conviction and, or a
substantially large monetary fine.126
Finally, the Amendment requires that all companies have a Secretary. It also enhances the
qualifications of the Secretary. The Act requires that the Attorney General gives direction
for compliance with the Act. Despite the Registrar of Companies serving under the Office
of the Attorney General, the Amendment gives the power to give direction directly to the
Registrar of Companies.127
The Amendment invests in the aspect of disclosure on the part of the directors. The issue
of conflict of interest has also been captured in the same frame. However, the Amendment
fails in addressing issues regarding the role of executive directors, rules for financial
reporting and setting guidelines for the small companies’ regime and sole director
companies. There has not been sufficient consultation in the formulation of this
Amendment to enable the Act instil best practices in the management of companies.
2.4.2 Companies (General) Amendment Regulations 2017 (‘the Regulations’)
There is a need for a comprehensive guideline on the filing of directors’ remuneration
reports. In developing guidelines, the format and content of the report should be
considered. The term ‘remuneration’ should be clearly defined. Other factors to be
considered include: the reports should also be filed with an oversight authority that will
126 Monday, June 12 and 2017 14:32, ‘Why Being a Company Director May No Longer Be Rosy’ (Business
Daily) <http://www.businessdailyafrica.com/news/Why-being-a-company-director-may-no-longer-be-
rosy/539546-3966860-13iekej/index.html> accessed 14 August 2017. 127 Companies Amendment Act 2017 (n 55).
46
have the mandate over the reports, the frequency of filing the reports, the reporting period
and the duration for keeping the report should be considered.
In reporting its annual statements the chair of the remuneration committee is expected to
report on the directors’ remuneration and any alterations made on it. Companies are
required to have a director’s remuneration policy that is accessible to its shareholders. It
should contain the terms and conditions for director remuneration. The remuneration
should be commensurate with the director’s performance and their share options. The
criteria used for evaluating performance should be in the report. The director’s contract of
service should be included in the remuneration report. The remuneration report should
disclose information pertaining individual directors. These shall form part of a company’s
financial statements.
The Regulations give guidelines detailing the information to be outlined in the report. The
information to be provided comprises of salaries, bonuses, allowances, compensation and
benefits paid to a director. Where remuneration is not in monetary form, it is to be
included in the report. Similarly, the Regulations outline information on share options and
long-term incentive schemes as director remuneration.128
In addition, director pension schemes and retirement benefits are to be highlighted. For
former directors, any payment made to them must be provided for in the report. These
payments should be as per their pension schemes. The Regulations are comprehensive
such that any payments made to third parties pertaining to services rendered by a director
are to be included in the report.
Remuneration policies should be structured such that remuneration is linked to rewarding
good corporate governance. The requisite procedures should be observed in establishing
128 Companies (General) Amendment Regulations 2017 (n 124).
47
the remuneration policy. This mitigates the damage on a company’s reputation based on
accusations of excessive pay to directors.129 However, the Regulations are still yet to be
enacted.
However, there is still no provision for an oversight authority to ensure that companies
comply with the regulations. Further, the Regulations do not require companies to avail a
remuneration policy to go hand in hand with the directors’ remuneration reports. From the
Act, the role of the registrar is only clerical. The only consequence attaching for failure to
file director’s remuneration reports is a fine which most companies can afford.
2.5 Conclusion
This chapter illustrates the Constitutional basis of corporate governance and discusses the
corporate governance regulatory framework of listed companies and unlisted companies
in Kenya. It focuses on the ability of the legislation to ensure compliance with good
corporate governance practices. From the discussion, the regulatory framework governing
listed companies has more effective enforcement mechanism compared to that of unlisted
companies. The mechanisms in place include regulations backed with sanctions and an
oversight authority that has the discretion to impose uncodified sanctions upon miscreant
companies.
However, the provisions of the Companies Act 2015 are suggestive in nature. It does not
provide for an oversight authority to monitor financial reporting, accounting standards,
and director remuneration reports, among others. The loopholes in the Act identified in
the Act include lack of a firm approach to the declaration of interest by directors, lack of
recognition on the role of non-executive directors, ambiguity in the definition of small
companies regime, lack of a financial reporting standard and lack of guidelines on
129 Cornelis De Groot, ‘Executive Directors’ Remuneration’ (2006) 3 European Company Law 62.
48
directors remuneration report. It is evident that the Act is ineffective in the enforcement of
good corporate governance practices. The Companies Amendment Bill 2017 and the
Companies General Amendment Regulations 2017 do not close these gaps.
The discussion in this chapter forms the basis of the discussion in Chapter Three. Chapter
Three identifies best practices in the USA and South Africa. The best practices discussed
in the next chapter are based on the weaknesses in the corporate governance regulatory
framework in Kenya. The best practices are discussed to fill in the gaps in the Kenyan
context. The recommendations for reform in Kenya shall be based on these best practices.
49
CHAPTER THREE: BEST CORPORATE GOVERNANCE PRACTICES:
LESSONS FROM THE UNITED STATES OF AMERICA AND SOUTH AFRICA
3.1 Introduction
Kenya would benefit from borrowing from corporate governance best practices in other
jurisdictions. This chapter draws lessons from the best practices in the United States of
America (USA) and South Africa while reviewing proposed legislation aimed at
addressing the inadequacies in Kenyan law in corporate governance.
The best practices discussed in this chapter are to inform the weaknesses in the Kenyan
regulatory framework. They should be able to fill in the gaps identified in chapter 2. They
shall ultimately inform the recommendations for reform made at the end of this research.
The researcher chose the USA due to the approach the Sarbanes Oxley Act takes on
compliance with good corporate governance practices following. This legislation was
developed as a response to several corporate scandals which introduced drastic measures
of corporate governance in order to quickly instil confidence in investors.130
The researcher selected South Africa since it is a leading developing country in Africa. It
has also been keen on updating its corporate governance regulatory framework with the
King Reports on corporate governance and incorporated the principles therein into their
Companies Act 2008.131132
The researcher describes the evolution of corporate governance in both the USA and
South Africa to contextualize the discussion on the best practices in the two jurisdictions.
130 Investopedia Staff, ‘Sarbanes-Oxley Act Of 2002 - SOX’ (Investopedia, 25 November 2003)
<http://www.investopedia.com/terms/s/sarbanesoxleyact.asp> accessed 13 July 2017. 131 ‘King Report on Corporate Governance in SA : Institute of Directors in Southern Africa (IoDSA)’
(Institute of Directors in Southern Africa (IoDSA)) <thttp://www.iodsa.co.za/?page=KingIII> accessed
13 July 2017. 132 Thomas Hemphill, ‘The Sarbanes–Oxley Act of 2002: Reviewing the Corporate Governance Scorecard’
[2017] The Journal of Corporate Citizenship 23.
50
The researcher is aware that the regulatory framework on corporate governance in the two
jurisdictions is not conclusive but opines that borrowing from them would substantially
enrich Kenya’s regulatory framework on corporate governance.
3.2 Evolution of Corporate Governance in South Africa and the USA
3.2.1 South Africa
Corporate governance in South Africa has evolved significantly since the end of the
apartheid era. The evolution began with steps made in achieving economic growth to
improve the standards of living. This saw to the return of foreign investors to South
Africa. In the 1990s, South Africa returned to the global economy which was reflected in
the sudden fall in equity prices. This put pressure on companies and foreign investors
who had lacked good corporate governance practices and structures. In the late 1990s,
South Africa realized the negative impact of poor corporate governance on developed
countries. Good governance was discovered to be important for long-term economic
stability of the country.133
Corporate governance gained momentum causing more focus being put on listed
companies. Legislative reforms were witnessed such as the enactment of the Insider
Trading Act. The Johannesburg Stock Exchange, the regulator of the securities market
introduced stricter listing requirements. Accounting standards were introduced to create
emphasis on the disclosure of conflicts of interest. Finally, it is during this time that
voluntary compliance was introduced as an experiment. This saw to the development of
the King Reports of South Africa.134
The first King Report was released by the King Committee of Corporate Governance in
133 Charles P Oman, Corporate Governance in Development: The Experiences of Brazil, Chile, India and
South Africa (Centra for International Private Enterprise). 134 ibid.
51
November 1994. It was heavily influenced by the Cadbury Report and focused on the
functioning of the Board of Directors. The King II focused on the qualitative nature of
good corporate governance as required by the law. However, it did not take a regulatory
approach.135
King III is the most recent report and similar to the previous King Reports, it was not
inspired by any corporate scandals.136
3.2.2 United States of America
The Sarbanes Oxley Act was the most significant step in corporate governance in the
USA. It was a reaction to the wave of corporate scandals such as Tyco, Enron and
others.137
Tyco was a conglomerate known for acquiring thousands of companies. Initially, it was
known for trading fire protection systems. It acquired companies manufacturing medical
products, security systems, industrial valves and others. Tyco’s CEO was well known for
cost reduction and increasing profits. An analyst started questioning the company’s
accounting practices.138 Soon enough, the company was accused of delaying payments
due to decreased cash flow. Its stock on the capital markets dropped significantly causing
it to be halted from trading. Even after resuming trading on the stock exchange, Tyco’s
accounting practices were still being questioned.139 It later emerged that its CEO was
under trial for tax evasion. During his trial, other board members were found to have been
compromised by conflicts of interests through receiving and authorizing large bonuses to
135 Philip Armstrong, ‘Corporate Governance in South Africa - Developments and Capacity Building’
[2006] Handbook on International Corporate Governance. 136 ‘Voluntary Corporate Governance Disclosures by Post-Apartheid South African Corporations’ [2012]
Journal of Applied Accounting Research 37. 137 Lei Yang, ‘Corporate Scandals and Corporate Governance Agenda’ (2006) 3 US-China Law Review 75. 138 Jerry W Markham, A Financial History of Mordern U.S. Corporate Scandals From Enron to Reform
(ME Shapre, Inc, 2006). 139 ibid.
52
the detriment of shareholders.140
Enron Corp was a large company trading in energy. In 2001, market analysts urged many
to invest in it since it was a good performer on the capital markets and the seventh largest
energy company.141 By the end of 2001, Enron filed for bankruptcy. The board of
directors were the root of the scandal. They conducted fraudulent activities and were
compromised by conflicts of interests. The audit committee failed in its auditing and
financial reporting function. Further, the gatekeepers of corporate governance failed in
their mandate. Consequently, Enron’s employees lost their jobs, savings and pensions.
Seven months after filing for bankruptcy, the Sarbanes Oxley Act was enacted142
It was enacted to bring sanity and restore confidence in the capital markets.143 It was a
good attempt to deal with the agency problem.144
3.3 Role of Non-executive Directors
The role of the board of directors in any company is to serve as an internal corporate
governance control mechanism. Non-executive directors serve as a checks and balances
mechanism on executive directors. Despite directors being put in office by shareholders,
the shareholders are not in the position to scrutinize their activities in the management of
company affairs. Hence, non-executive directors are entrusted to protect shareholders.145
In the USA, company legislation varies depending on the state. Most companies depend
on the company legislation originating from Delaware State. There are model legislations
140 ibid. 141 Yang (n 137). 142 ibid. 143 Markham (n 138). 144 Scott Green, Manager’s Guide to the Sarbanes Oxley Act, Improving Internal Controls to Prevent Fraud
(John Wiley & Sons Inc, Hoboken New Jersey 2004). 145 Sally Wheeler, ‘Non-Executive Directors and Corporate Governance’ (2009) 60 Northern Ireland Legal
Quarterly 51.
53
but some states decline to adopt any of them e.g. Louisiana.146 However, the Sarbanes
Oxley Act Sec 101 provides for the Public Company Accounting Oversight Board
(PCAOB) which gives oversight on the auditing function of companies in the securities
market. It serves as a check and balances measure on the board of directors.
In South Africa, King II emphasized a unitary board structure comprising both executive
and non-executive directors. It also provided for the responsibilities of the board of
directors. It also recommended for the separation of the position of the CEO and
Chairperson. The principles enshrined in the King reports have been incorporated into
South Africa’s new Companies Act.147 In this legislation, the word ‘director’ is inclusive
of both executive and non-executive directors. Their roles are extensively provided for.148
Kenya should consider having in place guidelines for corporate governance for unlisted
companies. In these regulations, the role of non-executive directors should be
acknowledged. The Companies Act need not be amended to include non-executive
directors since not all best practices are codified.
3.4 Financial Reporting Function
Legislation plays an important role in corporate governance. Corporate scandals in the
1930s influenced the enactment of the Securities Act 1933 and Securities Exchange Act
1934. In addition, it was required that inventories be monitored and accounts to be
confirmed, a move which affected auditors’ operations.149 Other influential reforms were
championed by Sarbanes Oxley Act 2002 (Sarbox), regulations enacted by the Securities
and Exchange Commission (SEC) and amended requirements for listing companies on
146 Gero Pfeiffer and Sven Timmerbeil, ‘US-American Company Law – An Overview’. 147 Companies Act (South Africa) 2009. 148 Nicolene Schoeman Louw, ‘Executive and Non-Executive Directors in Terms of the New Companies
Act’ <https://www.schoemanlaw.co.za/executive-and-non-executive-directors-in-terms-of-the-new-
companies-act/>. 149 Patrick Kenny, ‘Corporate Governance in the U. S.: Post-Enron’, Current Trends in Corporate
Governance (2002).
54
the New York Stock Exchange (NYSE).150
Sarbox introduced reforms in financial control, accounting and audit processes in
companies. All public listed companies were expected to report their internal accounting
controls annually to SEC.151 Public Company Accounting Oversight Board (PCAOB)
were established to supervise the audit function of companies. It was empowered to set
accounting standards for companies. Companies that did not comply are subjected to
investigation and disciplinary procedures imposed by PCAOB. It revolutionized the
contemporary accounting function. Auditors were required to report audited accounts to
the audit committee in the company.152 It is this audit committee that is responsible for
compensation and reviewing the auditor’s output. The audit committee is required to
establish reporting procedures for complaints on the audit function such as undue
influence on the audit committee. 153Where the audit committee is under undue influence
from a company, it has the power to declare the financial statements to be misleading.
This was aimed at establishing the stewardship element among auditors. The purpose of
this enactment was to achieve objectivity in accounting and auditing functions in
companies.154
In addition to the audit committee requirement, internal corporate governance structures
were introduced. It introduced the aspect of gatekeepers of corporate governance in
companies. Auditors and in-house advocates bear the responsibility of ensuring that
corporate governance practices are upheld. It also brought focus on auditors and the CEO
in their role to advance the corporate governance cause at a time where their role had not
150 Robert B Thompson, ‘Corporate Governance After Enron’ (2003) 40 Houston Law Review. 151 Sarbanes Oxley Act, Section 404 152 Hemphill (n 132). 153 Stephanie Tsacoumis, Stephanie R Bess and Bryn A Sappington, ‘The Sarbanes-Oxley Act: Rewriting
Audit Committee Governance’ (2003) 2003 Business Law International 212. 154 ibid.
55
been sufficiently provided for both in statute and literature.155 Section 304 of Sarbox
provides that where a company restates its financial statements due to material non-
compliance, misconduct or with any financial reporting requirement, the CEO and CFO
must reimburse the company for any bonuses or other incentive or equity-based
compensation received during the 12-month period following issuance of the financial
statements during that 12-month period. This approach identified the link between the
gatekeepers and their role in corporate governance as opposed to focusing on the board of
directors alone.
The Sarbox required companies to disclose their financial accounts to reduce the
possibility of deceiving stakeholders of the company’s accounts. This was guaranteed by
the requirement of the CEO and CFO to certify financial statements.156 This has the ripple
effect that they would be held liable where the financial statements did not reveal the
company’s true state of affairs. By such certification, they certify the internal controls and
disclosure mechanisms in place in the company.157
The two regimes governing corporate governance in South Africa include legislation and
codes of good corporate governance. Over the years, the codes have found their way into
legislation and may be enforced by the court.158
The Institute of Directors of South Africa published the first King Report (King I) on
corporate governance in 1994. It was a response to corporate scandals which proved that
there was a need to formalize a code of corporate governance. It was based on corporate
155 Thompson (n 150). 156 Lawrence E Mitchell, ‘The Sarbanes Oxley Act and the Reinvention of Corporate Governance’ (2003)
48 Villanova Law Review 1189. 157 ibid. 158 Philip C Aka, ‘Corporate Governance in South Africa: Analyzing the Dynamics of Corporate
Governance Reforms in the “Rainbow Nation”’ (2007) 33 orth Carolina Journal of International Law
and Commercial Regulation 219.
56
governance principles according to common law.159
Besides directors’ duties, it covered risk management, internal auditing, sustainability
reporting and accounting procedures in companies.
As regards risk management, companies were to establish a set of internal controls to
mitigate risks through its board. A risk management system was important to help identify
new opportunities for the company and to protect shareholders.160 King II identified the
importance of internal auditing for companies. The auditors could either be internal or
external auditors. The audit was to evaluate internal controls such as risk management. It
recommended that audits be conducted annually or more often in larger companies.161
It also recommended external audits be conducted on the company. Directors were under
a duty to ensure that the company remains a going concern. Material changes in a
company’s financial statements were to be explained. An audit committee was to be set
up to serve several functions but mainly to review the accuracy and reliability of financial
reports.162 The Johannesburg Stock Exchange required companies to have a statement in
their financial reports on how they had complied with the provisions of the King II
report.163
King II required directors to confirm that internal controls are sufficient. King III
recommends internal audits to be based on potential risks the company is likely to
encounter based on its strategic direction.164 The adequacy of a company’s internal
159 Lindie Egelbrecht, ‘Corporate and Commercial/King Report on Governance for South Africa -
2009/Acknowledgments’ (Institute of Directors). 160 ‘Corp Govern Document - CD_King2.pdf’ <https://www.mervynking.co.za/downloads/CD_King2.pdf>
accessed 24 July 2017. 161 ibid. 162 ibid. 163 Egelbrecht (n 159). 164 ‘King Report on Corporate Governance in SA : Institute of Directors in Southern Africa (IoDSA)’ (n
131).
57
controls is assessed against its strategic development structure. This requirement sought
to add value to internal audits.165
3.5 Disclosure and Declaration of Interest
The Securities Exchange Commission (SEC) was established by the Securities Exchange
Act 1934.166 SEC embarked on the implementation of the Sarbox by proposing
regulations to that effect.167
Initially, company’s disclosure was limited to few events such as bankruptcy, disposal or
acquisition of main company assets, change in the company’s management and
accountants. SEC introduced more events for disclosure bringing it to a total of 22 events.
Examples of additional events include extensive financial information, corporate
governance management system, among others. Depending on the event, the reporting
timelines were reduced to alert shareholders of changes in a company’s financial
condition.168 In similar fashion, SEC issued an order requiring financial reports to be
certified by the company CEO and CFO. The certification is to declare that the statements
made in the report are true and material facts have not been omitted. Where they do not
certify them, they are required to file statements under oath.169
Sarbox uses disclosure as a tool to compel compliance with good corporate governance
practices. Through the disclosure mechanisms in place, it made it easier for directors to
assess the company’s portfolio in terms of performance. The gatekeepers of corporate
165 ibid. 166 ‘SEC.gov | What We Do’ <https://www.sec.gov/Article/whatwedo.html> accessed 24 July 2017. 167 ‘The US Concept of Corporate Governance under the Sarbanes-Oxley Act of 2002 and Its Effects in
Europe – (2007)’ (1 September) 4 European Company and Financial Law Review 417. 168 ‘Final Rule: Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date; Rel. No.
33-8400; S7-22-02’ <https://www.sec.gov/rules/final/33-8400.htm> accessed 14 July 2017. 169 ‘SEC Requires CEOs and CFOs to Certify the Accuracy of SEC Reports -
SEC_Requires_CEO_CFO_Accuracy.pdf’
<http://www.willkie.com/~/media/Files/Publications/2002/07/SEC%20Requires%20CEOs%20and%20
CFOs%20to%20Certify%20the%20Accura__/Files/SECRequiresCEOCFOAccuracypdf/FileAttachment
/SEC_Requires_CEO_CFO_Accuracy.pdf> accessed 14 July 2017.
58
governance are strengthened and government oversight authorities perform their
oversight role more effectively. To prevent the harm that Enron’s shareholders faced,
disclosure and application of clear accounting rules present a viable solution as opposed
to the solution offered by insolvency law. Moreover, companies are required to disclose
annually their code of conduct which the directors and other executive officials of the
company are expected to comply with. Reasons are to be given where the code of conduct
has not been complied with.170
The King II Report in South Africa expounded on the King I Report. Besides the profit-
making, it adopted a more holistic approach to the responsibilities of a company. It
identified impact of company affairs on the economic and societal environment in which
companies operate. Companies were implored to adopt an inclusive approach in corporate
governance issues. Boards were encouraged to incorporate the pillars of corporate
governance in their affairs. King II proposed a remuneration committee to determine
remuneration packages for executive directors in the company. The performance of
directors in companies was to be evaluated by a committee. The remuneration packages
were also to be based on the evaluation reports.171
King III highlights the importance of disclosure of material facts in a company through
integrated reports. King III adopts a similar approach to the Sarbox in the USA. From the
reports, it should be clear whether or not the company is still a going concern. Both
positive aspects and challenges the company has encountered are to be set out. Where a
company is not a going concern, the directors are to state the strategies to be implemented
to reverse the situation. King III prescribes the IFRS on company financial reports for
consistency. The report should enable potential investors of economic and book values of
170 Hemphill (n 132). 171 ‘Corp Govern Document - CD_King2.pdf’ (n 160).
59
the company. For the veracity of the information given to shareholders, external auditors
are required to give an assurance report. This was aimed at fostering good relationships
with shareholders.172
Sustainable practices are to be integrated into company policies to ensure integrated
performance. Sustainability reporting was introduced by King II. Companies stand to
benefit from integrated sustainability reporting since shareholders will be confident in
investing in the company. Information contained in sustainability reports helps determine
the impact a company has in its community, whether positive or negative. Hence, the
reports should highlight information that can be compared with the company’s past
performance.173 Due to globalization, the success of any company can be determined by
social aspects, the political and natural environment in the communities they operate.
Companies are compelled to balance their short-term and long-term targets.
3.6 Directors’ Remuneration Report
SEC put in place regulations for directors’ remuneration reports. Companies are required
to disclose directors’ remuneration which is to comprise of tabulated reports, narrative
reports on the remuneration and a Compensation Discussion and Analysis (CD&A). The
narrative reports are to compliment the tabulated reports such that they give details to
help understand the submitted information. The tabulated report should contain
information on directors’ remuneration for the past three years. The reports should contain
information on the salary, bonuses awarded, equity awards and deferred remuneration.
SEC has also recommended rules to apply to the reporting of equity awards. Recently,
SEC requires companies to make full disclosure of remuneration of their executive
officials.
172 ‘King Report on Corporate Governance in SA : Institute of Directors in Southern Africa (IoDSA)’ (n
131). 173 ibid.
60
The CD&A should contain information on the company’s objectives and its remuneration
policy. From the remuneration policy, it should state the elements of remuneration, the
company’s reasons for remunerating those specific elements, how the company
determines remuneration to be paid and the company’s compensation objectives.
Essentially, a CD&A is based on the principles of transparency. Shareholders get a clear
picture of the company’s remuneration policies.
The disclosure standards for companies in the USA are among the most admirable in the
world. The disclosure of remuneration is in a prescribed format which makes it possible
to compare with other companies. Further, the SEC provides an oversight function on the
filing or remuneration reports.174
Section 30(4) of the Companies Act of South Africa requires companies to submit audited
accounts. The audited accounts should include a remuneration report. All benefits paid to
any persons holding a prescribed office in the company should be accounted for. Section
30(5) prescribes a form in which such disclosure is to be made. Section 30(6) describes
the term remuneration as monies paid for services rendered, salaries, bonuses,
allowances, contributions towards a pension scheme and financial assistance given to a
past or present director.175
King II emphasized for a unitary board structure comprising both executive and non-
executive directors. It also proposed a remuneration committee to determine remuneration
packages for executive directors in the company. The performance of directors in
companies was to be evaluated by a committee. The remuneration packages were also to
174 ‘Disclosure of Remuneration of Executives and Directors of Public Companies and State-Owned or
State-Controlled Companies — Right2Info.org’ <http://www.right2info.org/testing/deleted-
stuff/remuneration-of-executives/disclosure-of-remuneration-of-executives-and-directors-of-public-
companies-and-state-owned-or-state-controlled-companies#_ftn5> accessed 19 September 2017. 175 Companies Act (South Africa) (n 147).
61
be based on the evaluation reports.176
3.7 Companies Regime
In South Africa, the King Reports apply to all companies. Each of the King Reports
builds on the strengths of the former King Report. The King III is currently the
operational one. South Africa’s Companies Act is based on the principles enshrined in the
King Reports. The core principles in King III were compressed, making it easier to apply
in different public and private companies of different sizes, including sole director
companies, small companies and listed companies. It is more results oriented compared to
King III.
The Institute of Directors through the King Committee has already drafted a King IV
Report. This was prompted by financial instability in the world and more so by the Brexit.
King IV adopts an ‘apply and explain’ approach in its implementation. Similarly, it is to
be applied to all companies depending on the company’s objectives. It is more results
oriented compared to King III.177 These principles can be categorized according to their
perceived outcomes which include ethics in leadership, creating value in the company,
effective internal controls and transparency for the benefit of stakeholders. Under each of
the principles, King IV provides a guideline for its implementation. The supremacy
provision in King IV provides that where it contradicts any enacted legislation, the latter
shall prevail.178 This approach creates uniformity and introduces order in company’s
legislation. In Kenya however, the Act provides for a small companies regime which is
misguiding. Some provisions of the Act do not apply to “small companies”. There is need
to set guidelines for the small companies regime.
176 ‘Corp Govern Document - CD_King2.pdf’ (n 160). 177 Ansie Ramalho, ‘Report on Corporate Governance for South Africa’ (Institute of Directors 2016). 178 Nastascha Harduth and Laura Sampson, ‘A Review of the King IV Report on Corporate Governance’
(Werksmans Attorneys).
62
The USA however does not offer any best practices in terms of separation of “big and
small” companies. The law applying to companies varies from state to state. Some
separate big and small companies. Despite there being model regulations, states are still
free to deviate from them.
3.8 The Role of Non-Executive Directors
In South Africa, the law does not distinguish the categories of directors. The King III
Report defines the role of all categories of directors. It provides that non-executive
directors are required to weigh in their judgment in issues facing the company from an
objective point of view.
Non-executive directors can weigh in their objective views due to the fact that they are
not included in the day to day management of the company. They are required to meet
and evaluate the performance of executive directors.179 The Companies Act in South
Africa does not distinguish between the two categories of directors. Instead, the definition
of directors encompasses both executive and non-executive directors.180
The USA does not present best practices for non-executive directors from which Kenya
can learn.
3.9 Conclusion
This chapter sought to study best practices in United States of America and South Africa
that Kenya can borrow from. It also highlighted the steps Kenya has made towards
ensuring compliance with good corporate governance practices enshrined in the
Companies Act 2015.
179 ‘The Different Types of Directors’ (Deloitte). 180 ‘Executive-and-Non-Executive-Directors.pdf’ <https://www.schoemanlaw.co.za/wp-
content/uploads/2011/10/Executive-and-non-executive-directors.pdf> accessed 17 October 2017.
63
There is need to harmonize the Companies Act 2015 in order to introduce order and
uniformity. The USA and South Africa have clear regulations on disclosure of
information, details of financial accounting, directors’ remuneration reports and South
Africa on the uniformity companies’ regime. These countries have invested in regulations
on disclosure of information which is the direction Kenya should take.
This chapter acknowledges the dual system adopted in South Africa to ensure
compliance. South Africa adopts both a legislative and voluntary regulatory system.
Aspects of the voluntary regulatory system have been incorporated into the legislative
framework. The court has been given the discretion to enforce the voluntary regulatory
system on companies in some circumstances. Its voluntary system is comprehensive and
simple enough to be applied to different types and sizes of companies.
Chapter Four of this research investigates the effectiveness of the Companies Act 2015 in
ensuring compliance with best practices by collecting responses from legal practitioners
through questionnaires. The questionnaire is designed to examine the loopholes identified
in this chapter and chapter two.
64
CHAPTER FOUR: DATA AND ANALYSIS
4.1 Introduction
This chapter is based on the desk research as analyzed in chapters 1, 2 and 3. This chapter
complements the desk study by investigating the weaknesses in the corporate governance
regulatory framework in Kenya as identified in the previous chapters through fieldwork.
The research presented in this chapter is an analysis of the responses of legal practitioners
(“the respondents”) collected through a questionnaire.
The researcher designed the questionnaire specifically to investigate the effectiveness of
the Companies Act 2015 (the Act) in ensuring compliance with best practices. The gravity
of the weaknesses of the Act is tested. The responses obtained shall be presented in tables
and graphs. The data shall be broken into two parts. The first section deals with the
background information, while the other section presents findings of the analysis based
on the objectives of the study as explored by the questionnaires where both descriptive
and inferential statistics have been employed. The gravity of the loopholes identified in
Chapter 2 is rated on a Likert Scale and the same is analyzed. The respondents were also
required to give recommendations for reform.
This chapter confirms the hypothesis of this research. It confirms that the corporate
governance legislative framework in Kenya in ensuring compliance with good corporate
governance practices. It proves that there is need to have in place a more effective
enforcement mechanism in Kenya.
4.2 Data Findings
4.2.1 Response Rate
It was noted from the data collected, out of the 50 questionnaires administered to legal
65
practitioners in Kenya, 48 questionnaires were filled and returned. This represented a
96% response rate, which is considered satisfactory to make conclusions for the study.
According to Mugenda and Mugenda,181 a 50% response rate is adequate, 60% good and
above 70%, very good. Hence, the response rate in this case according to Mugenda is
very good.
This high response rate is attributed to the data collection procedure, where the researcher
notified the potential participants in advance and applied the drop and pick method. The
respondents were advised to read the provisions of the Companies Act 2015, specifically
those that underpin this research. The questionnaires were picked at a later date to allow
the respondents adequate time to fill in the questionnaires. The responses indicated in this
chapter are an impression of the state of the law according to the data analysis.
Figure 4.1: Response rate
4.2.2 Demographic information
The demographic data seeks to establish the general information of the respondents. From
181 Olive M Mugenda, Research Methods: Quantitative and Qualitative Approaches (African Centre for
Technology Studies 1999).
66
the questionnaire, the following demographic statistics have established a category of the
respondents, their designation and years of experience either working or teaching
corporate governance. They are explained in the subsections below.
4.2.3 Category of the respondents
This section shows the category of the respondents. The results from the analysis of
findings are illustrated in the figure below as shown below.
Figure 4.2: Category of the respondents
From the analysis of findings, the majority of the respondents (46, 95.8%) indicated that
they were advocates. Only 4.2% of the total respondents indicated to be scholars. None of
the respondents fell in any other category.
4.2.4 Designation of the Respondents
The study sought to establish the designation of the respondents in the organizations. The
results from the analysis of findings are illustrated in the figure below as shown.
67
Figure 4.3: Respondents’ designation
From the analysis of findings, the majority of the respondents (29, 60.42%) indicated that
they were partners in different law firms in Kenya. 27.83% of the respondents indicated
that they were senior associates while 12.5% of the respondents indicated that they were
associates.
4.2.5 Years of experience in teaching/ working in corporate governance
The study also sought to establish the years of experience in teaching or working in
corporate governance. The results from the analysis of findings are illustrated in the
figure below.
68
Figure 4.4: Years of experience in teaching/ working in corporate governance
From the analysis of findings, most of the respondents (29, 60.42%) indicated that they
had 5 to 10 years’ experience. This was closely followed by respondents (13, 27.08%)
who indicated that they had more than 10 years’ experience. Only 12.5% of the total
respondents indicated that they had less than 5 years of working experience.
4.3 Data Analysis: Empirical Research Confirms Desk Research Findings
The study sought to establish from the respondents the influence of legislative framework
on corporate governance. Respondents sought to establish whether the respondents were
aware of the recent legal reforms introduced by the Companies Act 2015 to enhance
corporate governance. The results from the analysis of findings are illustrated in the
figure below as shown.
Figure 4.5: Legislative Framework
From the analysis of findings, the majority of respondents indicated that they were aware
of the recent legislative reforms introduced by the Companies Act 2015 (the ‘Act’). Only
69
33% of the total respondents indicated that they are unaware of the recent reforms
introduced by the Act. The respondents indicated that some of the reforms that they were
conversant with included; new sanctions in form of hefty fines and jail terms have been
introduced for noncompliance wherein the previous law; one would escape liability as
there was laxity in the law in ensuring compliance. Other legislative reforms introduced
by the Act included codification of director’s duties, sole director companies, the
provision for disqualification of directors which initially was only possible when a
company was being wound up and the introduction of guidelines for mergers,
amalgamation and takeovers by companies.
In addition, the respondents identified the establishment of a small company’s regime as a
significant reform. The governance requirements for small companies have been
redefined. For example, small companies do not have to prepare audited financial reports
as opposed to larger ones which have to file audited financial reports.
4.3.1 Responses to the Questionnaire
The respondents were asked to rate what they think about the different variables related to
legislative reforms on corporate governance on a five-point Likert scale. The range was
from ‘strongly agree (5)’ to ‘strongly disagree’ (1). A standard deviation of (greater than)
>1.5 implies a significant difference in the impact of the variable among respondents. The
study sought to determine whether the Companies Act 2015 effectively ensures
compliance with good corporate governance practices. The table 4.1 below shows the
findings of from the respondents.
70
Table 4.1: Legislative Framework on corporate governance
Statements Mean Standard
Deviation
The law adequately provides for transparency in the management of
company affairs
4.622 0.045
The law adequately provides for the separation of the position of the
CEO and Chairperson of the board of directors
4.493 0.421
The law adequately provides for directors’ fiduciary duties 4.482 0.706
The law adequately provides for declaration of conflict of interests by
the board of directors
3.335 1.000
The law provides for the protection of shareholders’ rights 4.054 0.584
The law requires companies to practice good corporate citizenship in
the communities within which they operate
4.021 0.584
The Companies Act 2015 has an effective corporate governance
enforcement mechanism
3.001 0.512
The Companies Act 2015 adequately provides for the role of non-
executive directors
2.998 1.412
The Companies Act 2015 adequately provides for accounting
standards for financial reporting
1.922 0.340
The Companies Act 2015 provides adequate guidelines for the small
companies regime
2.000 1.932
The Companies Act 2015 adequately provides for guidelines for the
directors’ remuneration report
1.500 0.210
The Companies Act 2015 adequately provides for the declaration of
interest and disclosure by directors
2.500 1.350
From the findings in the SPSS analysis, the majority of the respondents strongly agreed
that the law adequately provides for transparency in the management of company affairs.
This was supported by the mean value calculated being 4.622. A significant number of the
respondents also agreed with the statement.
The study notes that a significant majority agreed that the law adequately provides for the
separation of the position of the CEO and Chairperson of the board of directors. This was
71
seen to be true from the mean calculated of 4.493. The standard deviation calculated
indicates uniformity in the responses from the respondents.
The study also noted that a significant majority also agreed that the law adequately
provides for directors’ fiduciary duties. This was seen true by the mean calculated of
4.482. The standard deviation calculated indicated a little variation from the mean mark.
The study also noted that a significant majority also disagreed that the law adequately
provides for the declaration of conflict of interest by directors. This was seen true by the
mean calculated of 3.335. The standard deviation calculated indicated a high variation
from the mean mark.
The study also noted that majority of the respondents agreed that the law provides for the
protection of shareholders’ rights. This was seen true by the mean calculated of 4.054.
The standard deviation calculated of 0.584 indicated a little variation from the mean
mark.
The study also noted that majority of the respondents agreed that the law requires
companies to practice good corporate citizenship in the communities within which they
operate. This was seen from the mean calculated of 4.021. The standard deviation
calculated of 0.584 indicated there was uniformity in the responses from the respondents.
It was generally noted that the legislative frameworks have a significant effect on
corporate governance.
The study also noted that some respondents disagreed that the Companies Act 2015 has
an effective corporate governance enforcement mechanism. This was seen from the mean
calculated of 3.001. The standard deviation calculated of 1.350 indicated there were
substantial differential responses from the respondents. It was noted that the Act is
72
insufficient in its corporate governance enforcement mechanism.
The study also noted that most respondents disagreed that the Companies Act 2015
adequately provides for the role of non-executive directors. This was seen from the mean
calculated of 2.998. The standard deviation calculated of 1.412 indicated there were
differential responses from the respondents. It was noted that the Act does not adequately
provide for the role of non-executive directors.
The study also noted that most respondents disagreed that the Companies Act 2015
adequately provides for accounting standards for financial reporting. This was seen from
the mean calculated of 1.922. The standard deviation calculated of 0.340 indicated there
was uniformity of responses from the respondents. It was noted that the Act does not
adequately provide for the financial reporting standards.
The study also noted that some respondents agreed while most disagreed that the
Companies Act 2015 provides adequate guidelines for the small companies’ regime. This
was seen from the mean calculated of 2.000. The standard deviation calculated of 1.932
indicated there was diversity in responses from the respondents. It was noted that the Act
does not adequately provide adequate guidelines for the small companies’ regime.
The study also noted that some respondents agreed while most disagreed that the
Companies Act 2015 adequately provides for guidelines for the directors’ remuneration
report. This was seen from the mean calculated of 1.500. The standard deviation
calculated of 0.210 indicated there was little diversity in responses from the respondents
since they mostly disagreed with the statement. It was noted that the Act does not
adequately provide adequate guidelines for the director’s remuneration reports.
The study also noted that some respondents agreed while most disagreed that the
73
Companies Act 2015 adequately provides for the declaration of interest and disclosure by
directors. This was seen from the mean calculated of 2.500. The standard deviation
calculated of 0.210 indicated there was little diversity in responses from the respondents
since they mostly disagreed with the statement. It was noted that the Act does not
adequately provide adequate guidelines for the declaration of interest and disclosure by
directors.
4.3.2: Other Responses Received
The study also sought to establish whether Kenya can learn from the best practices in
other jurisdictions on legislative reforms in corporate governance. The results from the
analysis of findings are illustrated in the figure below as shown.
Figure 4.6: Lessons Learnt
From the analysis, the majority of the respondents (94%) indicated that Kenya would
benefit from borrowing some of the best practices in other jurisdictions on legislative
reforms in corporate governance. Some examples of legislative reforms that respondents
indicated they could learn from other jurisdictions included clearly defining the role of
executive and non-executive directors, setting accounting standards for financial reporting
and companies should disclose in each annual report the measurable objectives for
74
achieving gender diversity set by the board in accordance with the diversity policy and
progress towards achieving them, companies should disclose in each annual report the
proportion of women employees in the whole organization, women in senior executive
positions and women on the board among other positions.
4.7 Discussion
This discussion focuses on the key areas of this research as identified in previous
chapters. These include the lack of a firm approach to the declaration of interest by
directors, lack of recognition of the role of non-executive directors, ambiguity in the
definition of small companies, the lack of a financial reporting standard and the lack of a
guideline on the filing of directors’ remuneration reports. These issues are raised as the
weaknesses inhibiting the corporate governance legislative framework through the
Companies Act 2015 from effectively ensuring compliance with good corporate
governance practices. These gaps are discussed to determine the legal reforms necessary
to ensure the effectiveness of the legislative framework in ensuring compliance.
The literature review in Chapter 1 brought out the role of the legislative framework in
ensuring compliance with best practices. The legislative framework must be tailored to
suit the needs of the market in which it operates. This study took the approach that the
legislative framework is essential in upholding the culture of good corporate governance
principles. Theories in corporate governance should be cognizant of the market cultures
that inform legislative frameworks in this area.
The respondents acknowledged the positive changes towards corporate governance
through the enactment of the Companies Act 2015. However, despite the steps made,
there are still weaknesses in the Act that have seen most of its provisions not being
actualized. Hence, the respondents were of the view that the Act lacks an effective
75
corporate governance enforcement mechanism.
The first issue under discussion is the recognition of the role of non-executive directors in
corporate governance. Non-executive directors serve as gatekeepers of corporate
governance in companies. They are required to monitor and prevent the excesses of
executive directors in companies. Shareholders can only monitor the activities of the
board of directors through meetings open for them and through financial reports of the
company. The role of non-executive directors should not be overlooked since they have
the power to prevent corporate scandals in companies. Their role is only acknowledged in
regulations governing listed companies only. There is a need to recognize their role in
regulations governing unlisted companies. Some unlisted companies greatly influence the
livelihoods of communities. Corporate scandals in such companies have a great impact.
There is a need for legal reform to recognize the role of non-executive directors for the
greater good.
Further, setting financial accounting standards in corporate governance is important.
Despite there being a provision requiring that accounting standards be set for the financial
reporting function for companies, there have not been any steps made to the actualization
of this provision. Accounting standards for financial reporting are important to ensure
uniformity in financial reports. Such uniformity makes it easier to monitor the
performance of companies due to the uniformity of issues reported. So far, it is difficult to
establish the efficiency of directors in discharging their mandate through a company’s
financial reports. There is also no authority monitoring companies’ financial reports to
point out any anomalies. Financial reporting in unlisted companies is taken as a casual
exercise where non-compliance only warrants a small fine which is easily payable by
companies.
76
The small company’s regime is a new component introduced by the Companies Act 2015.
Some respondents were only made aware of it when answering the questionnaire. The
legislative framework gives very limited information on the regime. The provisions of the
regime are unclear and thus are likely to be abused by miscreant directors. There is a need
for comprehensive guidelines for small companies.
In addition, directors’ remuneration reports are an important component of corporate
governance. The filing of directors’ remuneration reports is provided for under Section
659 of the Companies Act. However, there are no guidelines for directors’ remuneration
reports. The term remuneration should be defined to mean all proceeds a director may bet
by virtue of their directorship in a company. There should be a requirement for the reports
to be consistent with the company’s remuneration policy. The duration for which these
reports are to be kept should be determined. These reports are aimed at establishing
transparency and accountability.
Finally, the disclosure of information and disclosure of conflicts of interests are essential
in corporate governance. Any corporate governance legislative framework should be
focused on disclosure of information and the disclosure of conflicts of interest. Conflict of
interest should be declared whether or not the other directors are aware of its existence. In
the case of Kenya, there is no requirement requiring the disclosure of profits made out of
conflicts of interest. Directors are likely to make secret profits from a company without
having to disclose the same. This oversight in the legislative framework can be said to
encourage the breach of fiduciary duties by directors. Directors should be held personally
liable for conflicts of interest that are to the detriment of stakeholders.
4.8 Conclusion
In conclusion, the study noted that majority of the respondents indicated that the reforms
77
introduced by the Companies Act 2015 positively influenced corporate governance in
Kenya. However, there are substantial negative responses on various parts of the Act
especially on the loopholes identified in Chapter 2.
This chapter proves the hypothesis of this research. The corporate governance regulatory
framework in Kenya is still wanting. It lacks an effective enforcement mechanism to
ensure compliance with best practices. The loopholes within the regulatory framework are
capable of being taken advantage of by miscreant directors at the expense of stakeholders.
Despite the positive reforms introduced by the Act, there is still more that can be done to
make it more effective. In this chapter, the research concludes that Kenya would benefit
immensely from borrowing from corporate governance best practices identified in other
jurisdictions. This is in support of the findings in Chapter 3.
The conclusions were drawn and recommendations made in the following chapter are
founded on the desk research and the fieldwork research conducted. Some of the
recommendations made shall be borrowed from the responses from the fieldwork.
However, not all the respondent’s responses shall be put into the recommendations
section. Some of the responses shall be considered for other areas of research.
78
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
5.1 Summary of Findings
The main objective of this study was to establish whether the corporate governance
regulatory framework as encompassed in the Companies Act 2015 is sufficient in
enforcing best corporate governance practices. The study encompasses a doctrinal and
empirical approach.
Chapter 2 discussed the Constitutional basis of corporate governance. The subsidiary
legislation on corporate governance highlighted in this thesis includes the Capital Markets
Act, NSE Regulations and Companies Act 2015. The gaps identified in the regulatory
framework are the lack of a firm approach to the declaration of interest by directors; lack
of recognition on the role of non-executive directors; ambiguity in the definition of the
small companies’ regime; lack of a financial reporting standard and the lack of a guideline
on directors’ remuneration report. Despite the attempts made at legislative reforms, some
of the proposed statutes and regulations have not been enacted. Further, there has been no
effort to close gaps identified in the legislative framework.
Chapter 3 identified best practices in the USA and South Africa from which Kenya can
learn to eliminate the weaknesses in the legislative framework. The best practices were
identified according to the thematic areas of the financial reporting function; disclosure
and declaration of interest; directors’ remuneration report and companies’ regime in those
jurisdictions. The best practices were identified to inform the recommendations for
reform for the case of Kenya.
Chapter 4 set out the empirical research to confirm the findings in chapter 2 and 3. The
findings demonstrate that the legislative framework is unable to sufficiently ensure
79
compliance with good corporate governance. The findings confirmed the gaps in the
legislative framework as identified in the desk research. These gaps ultimately affect the
effectiveness of the legislative framework to ensure compliance.
5.2 Conclusions
This study outlined the current status of the legislative framework in Kenya and identified
the weaknesses in the same. It can be concluded that the Companies Act 2015 is not
sufficient in ensuring compliance with best corporate governance practices. Amendments
to the legislative framework are necessary to ensure that there is a firm approach to the
declaration of interests by directors, recognition of the role of non-executive directors,
clarification of the small companies’ regime, setting of financial reporting standards and
the establishment of a concise guideline for directors’ remuneration reports.
The hypothesis of the study was that the corporate governance legislative framework of
corporate governance in Kenya is not effective in ensuring compliance with best
corporate governance practices. According to the findings of the study, this hypothesis has
been proved.
5.3 Recommendations for Reform
Based on the literature, survey and best practices in the USA and South Africa, there are
strong cases for reform.
The Companies Amendment Act 2017 was a good attempt at closing the gap on the
declaration of interest by directors. It enlarged the scope of disclosure by directors.
However, there is need to encompass the approach taken in the USA and South Africa.
South Africa requires companies to submit sustainability reports to help evaluate
company performance. In the USA, there is an authority in place to monitor disclosure of
information by companies. The legislative framework in Kenya would benefit from
80
having in place an authority to monitor disclosure of information by companies. Further,
there is need to include the declaration of secret profits by directors. Where a director
makes secret profits to the detriment of the shareholders, the director in question should
be required to compensate shareholders for the loss. Disclosure in corporate governance
should go beyond disclosure by directors only.
There is the need for the recognition of the role of non-executive directors in the
regulatory framework for unlisted companies. The regulatory framework for listed
companies shows a clear distinction on the role of executive and non-executive directors.
The latter is important in the sense that they are a checks and balances mechanism to
monitor the excesses of executive directors. In South Africa, the board of directors
comprises of executive and non-executive directors as per the King II report. Instead of
amending the Act to include non-executive directors, a code of corporate governance
should be established to emphasize their role. Unlisted companies would benefit from
such a code since they can opt whether or not to apply the provisions of the code.
In the Kenyan context, the legislative framework provides for a small companies regime.
However, the regime is still not clear. In the South African context, the provisions of the
Companies Act are founded on the King Reports which are applicable to all companies.
The King reports are made to be flexible such that they can be applied by all companies
depending on their size. This creates uniformity in the companies’ regime. In the Kenyan
context, there is need to have in place corporate governance guidelines that are easily
applicable to all companies. Having in place such guidelines would create uniformity in
the companies’ regime. From the level of applicability of such guidelines, it should be
easier to clarify on the provisions applying to small companies. In addition, sole director
companies should be
81
Chapter 4 also acknowledges that the USA has in place an oversight authority i.e.
PCAOB that monitors the accounting function of companies. However, in Kenya, there is
no authority monitoring financial reporting. Hence, there are not financial accounting
standards in place. The financial reporting and disclosure requirements for companies
play an important role in corporate governance. The setting up of an oversight authority
to monitor the financial reporting function is long overdue. The authority should set the
financial reporting standards and requirements for disclosure by companies with the aim
of protecting shareholders. This would have a positive impact on the small companies’
regime in the sense that companies that stop falling under the small companies’ category
with time would be identified easily. Companies’ financial reports would be objective,
making them more reliable. In addition, requirements for disclosure for sole director
companies would be enhanced and resultantly impose corporate governance best practices
on them.
The proposed Companies (General) Amendment Regulations 2017 is a good attempt at
closing the gap on the filing of directors’ remuneration reports. However, these
regulations are still yet to be enacted. In the USA, director’s remuneration reports are
submitted together with the company’s financial reports. They should be in line with the
company’s remuneration policy. The same is practised in South Africa where the
remuneration packages are determined by a committee. The directors’ remuneration
policy should be determined and the same be availed when submitting remuneration
reports. The reports should be kept for a duration of three years and should be submitted
together with financial reports. There is need to enact the Companies (General)
Amendment Regulations 2017 to make them fully operational.
Furthermore, there is need to establish a comprehensive code of corporate governance.
82
The code should be applicable to all companies as is the case in South Africa. The code
should be flexible for companies to apply depending on their size regardless of the
markets in which they participate in. It should move away from the ‘comply or explain’
approach and instead adopt an ‘apply and explain’ approach. Companies would then
ensure that they have internal controls in place to ensure compliance with the code. The
communities in which companies operate will stand to benefit the most from
sustainability reporting.
The Companies Act 2015 increased the penalties for noncompliance with its provisions.
However, there is need to diversify the sanctions to attach for noncompliance. The
Registrar of Companies or an alternate body should be given the discretion to impose
different sanctions on companies other than those in the Act. This would have a deterrent
effect and resultantly discourage noncompliance.
With these recommendations, the Act should be more effective at ensuring compliance
with good corporate governance practices.
5.4 Proposal for Further Research
From the field research, one interesting area identified for further research is the gender
equity in the company board structures and steps made towards achieving gender
diversity in the board of directors. There is concern over the role of gender balance in
corporate governance.
83
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The Constitution of Kenya 2010
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APPENDIX 1: RESEARCH QUESTIONNAIRE
I invite you to participate in a survey of the corporate governance legislative framework
in Kenya.
This survey forms part of my Masters of Laws (LL.M) research thesis at the University of
Nairobi. This survey aims at investigating the extent to which the Companies Act 2015
enhanced the corporate governance legislative framework in Kenya. The results of the
survey will help formulate the proposals to assist in ensuring compliance with corporate
governance standards in place. The data collected shall remain confidential.
SECTION A: GENERAL INFORMATION
1. Which category do you fall under?
Scholar [ ] Advocate [ ]
Other [ ]
If other, please explain:
2. What is your designation?
3. Years of experience teaching or working in corporate governance?
Less than 5 years [ ]
5 - 10 years [ ]
More than 10 years [ ]
SECTION B: LEGISLATIVE FRAMEWORK ON CORPORATE GOVERNANCE
1. Are you aware of the recent legal reforms introduced by the Companies Act 2015
to enhance corporate governance?
Yes [ ] No [ ]
2. If yes, what are some of the reforms you are well versant with?
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3. State the extent to which you agree or disagree with the following statements on
legislative reforms in corporate governance in Kenya. Please mark with (X)
Statements Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
The law adequately provides for
transparency in the management of
company affairs
The law adequately provides for the
separation of the position of the CEO and
Chairperson of the board of directors
The law adequately provides for directors’
fiduciary duties
The law adequately provides for
declaration of conflict of interests by the
board of directors
The law provides for the protection of
shareholders’ rights
The law requires companies to practice
good corporate citizenship in the
communities within which they operate
The Companies Act 2015 lacks an effective
corporate governance enforcement
mechanism
The Companies Act 2015 does not
recognize the role of non-executive
directors
The Companies Act 2015 adequately
provides for accounting standards for
financial reporting
The Companies Act 2015 provides
adequate guidelines for the small
companies regime
The Companies Act 2015 adequately
provides for guidelines for the directors’
remuneration report
The Companies Act 2015 adequately
provides for the declaration of interest and
disclosure by directors
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SECTION C: GAPS IN THE LEGISLATIVE FRAMEWORK ON CORPORATE
GOVERNANCE.
1. With the enactment of the Companies Act 2015, has there been positive change in
corporate governance in Kenya?
Yes [ ] No [ ]
2. If no, what are some of the challenges you have experienced?
SECTION D: LESSONS KENYA CAN LEARN FROM OTHER JURISDICTIONS
1. Do you think Kenya can learn from the best practices in other jurisdictions on
legislative reforms in corporate governance?
Yes [ ] No [ ]
2. What legislative reforms can Kenya learn from the best practices in other
jurisdictions on ensuring compliance with corporate governance?
