1 INTRODUCTION
Corporate
Governance is a novel concept[1].
Many people have tried to define it but the definitions are not substantive.
They merely describe the concept and the analysis of corporate governance in
Kenya is based on these descriptions.The attempts to define the term are given
below.
Corporate
Governance refers to the manner in which the power of a corporation is
exercised in the stewardship of the corporation’s total portfolio of assets and
resources with the objective of maintaining and increasing shareholder value
and satisfaction of other stakeholders in the context of its corporate mission[2].
Another definition states that Corporate Governance is the process and
structure used to direct and manage business affairs of the company towards
enhancing prosperity and corporate accounting with the ultimate objective of
realizing shareholders long-term value while taking into account the interest
of the stakeholders[3].
From
the above descriptions the term corporate governance denotes the roles played
by directors, shareholders and stakeholders of a company at large. It generally
refers to the structure and process of management of the company’s affairs.
Corporate
governance can be classified as regulatory or voluntary. Regulatory corporate governance refers to an
arrangement whereby the state through its institutions sets the minimum
standards that are to be observed by the companies. On the hand voluntary
corporate governance refers to manner in which companies take personal
initiatives to manage the manner in which they conduct their business. It
entails formulation of private codes of conduct which see to it the affairs of
the company are run properly.
2 LAWS GOVERNING CORPORATE GOVERNANCE
The
laws which govern corporate governance in Kenya are the Capital Markets Act,
cap 485A Laws of Kenya, the companies Act, cap 486 Laws of Kenya, the Penal
Code, cap 63 Laws of Kenya and the Guidelines on Corporate Governance Practices
by Public Listed Companies in Kenya which were established by the Capital
Markets Authority in 2002. Also, regional and international best practices form
part of the laws of Kenya.
2.1 THE CAPITAL MARKETS ACT
The
Act establishes the Capital Markets Authority for the purpose of promoting,
regulating and facilitating the development of an orderly, fair and efficient
Capital Markets in Kenya and for the connected purpose[4].
The capital markets act was amended by the Capital Markets (Amendment) Act No.
37 of 2012 to provide for regional and international cooperation. The regional
organization is the East African Securities Regulatory Authority. The
International Organization of Securities Commissions is the international body.
The Capital Markets Authority Act, 1989 was amended in 2000 and renamed the
Capital Markets Act.
Section
23 (3) of the Capital Markets Act provides that a person approved by the Authority
to carry out any business required by the Act shall comply with all
requirements of the Authority. Public listed companies and all market
intermediaries are licensed by the Capital Markets Authority(CMA). Market
intermediaries are all persons licensed under part IV of the Capital Markets
Act. Section 23 (1) of the Act provides that no person shall carry on business
as a stockbroker, dealer, investment adviser, fund manager, investment bank,
derivatives dealer, central depository, authorized securities dealer,
authorized depository, or hold himself out as carrying on such a business
unless he holds a valid licence issued under the Act or under the authority of
the Act.
The
Authority through section 11(3) v has the power to prescribe guidelines on
corporate governance of a listed company. Section 11(w) of the Capital Markets
Act provides that Authority has power to do all such other acts as may be
incidental or conducive to the attainment of the objectives of the Authority or
the exercise of its powers under this Act. This gives the Authority an inherent
jurisdiction to do any act aimed at developing corporate governance in Kenya.
This power was upheld in the case of Vania
Investments Pool Limited vs The Capital Markets Authority & Others[5].
2.2 THE GUIDELINES ON CORPORATE GOVERNANCE PRACTICES BY PUBLIC LISTED COMPANIES IN KENYA
The
guidelines are rule based since they are modelled on “Comply or Explain”. This
means that there are sanctions for non-compliance with the guidelines. The
guidelines are enforced by the Capital Markets Authority.
Section
2.5.1 provides for public disclosure and states that there shall be public
disclosure in respect of any management or business agreement entered into
between the company and its related companies, which may result in a conflict
of interest. The above section is strengthened by Section 2.1.5 of the
Guidelines which provides that there should be a formal and transparent
procedure in the appointment of directors to the board and all persons offering
themselves for appointment as directors should disclose any potential area of
conflict that may undermine their position or service as director. This
provision guards against conflict of interest in the handling of the company’s
matters and ensures that the matters of the company are properly handled.
The
authority of instituting a suit on behalf of the company is vested with the
board of directors who can lawfully authorize institution of the suit.
Instituting suits without authority defeats the very essence of effective
control of the company, which is against principles of good corporate governance
practices. In the case of East
African Portland Cement Limited Vs Capital Markets Authority & Others[6],the court held that the filing of the petition
was without the authority of the company hence striking out the petition. The
genesis of this case is the Annual General Meeting of East Africa Portland
Cement Company Limited that was held on the 17th December 2013.
Various resolutions were passed in that meeting including resolution number 4
which provided for re-election of directors. In this resolution Mr.
DidlerTresarrieu was elected the director of the company but his election was
marred with doubt due to allegations of conflict of interest. The NSSF and the
Treasury who are majority shareholders in the company alleged that they were
denied the right to call for a poll. The Capital Markets Authority was seized
of the matter and suspended the resolutions arising from the 17th
December 2013 Annual General Meeting pending investigation and determination of
the complaints.
East
African Portland Cement Company Limited moved the High Court to quash the order
of Capital Markets Authority which suspended the resolutions of the Annual
General Meeting. The court dismissed the suit on ground that the application
was without merit the director had conflated his personal interests with those
of the company and that the petition was nullity since it was filed without
authority of the company. This case illustrates the role of the court and
Capital Markets Authority in promoting good corporate governance best practices
in conducting a company’s affairs.
With
respect to shareholders the guidelines provide for approval of major decisions
by shareholders[7].
There should be shareholders participation and the board should provide the
shareholders with information necessary for this participation. Section 3.3 on
best practices relating to the rights of the shareholders states that the
essence of good corporate governance practices is to promote and protect
shareholders rights. Best practice entails treating all shareholders in equal
terms and the right of every shareholder to participate and vote at the general
shareholders meeting including the election of directors.
2.3 THE CAPITAL MARKETS (CORPORATE GOVERNANCE) (MARKET INTERMEDIARIES) REGULATIONS, 2011
Markets
intermediaries are persons licensed under part IV of the Capital Markets Act.
Section 23 (1) of the Capital Markets Act provides that no person shall carry
on business as a stockbroker, dealer, investment adviser, fund manager,
investment bank, derivatives dealer, central depository, authorized securities
dealer, authorized depository, or hold himself out as carrying on such a
business unless he holds a valid licence issued under this Act or under the
authority of this Act. Section 4 of the Act provides that a market intermediary
shall not appoint a person to be a director unless (a) that person is fit and
proper to hold such position; and(b) has undergone a relevant training on
corporate governance: Provided that a market intermediary shall ensure that any
person appointed as a director undergoes corporate governance training within
six months of appointment. This ensures that the people appointed as directors
have prerequisite knowledge for them to act as directors. This ensures that the
affairs of the company are managed according to the principles of good
corporate governance.
If
the and regulations are violated the Authority has power to take appropriate
action against the person breaching the said guidelines and regulations. Some
of the actions the Authority can take include with respect to the employees of
the company, in accordance with section 25(1) b of the Capital Markets Act, the
Authority should require the company to take disciplinary action against the
said employees, and disqualify such employees from employment in any capacity
by any licensed or approved person or listed company for a specified period of
time. The Authority can, also, in accordance with section 25(1) c of the Act,
disqualify a former director or a current director from appointment as a
director of a listed company or licensed or approved person including, a
securities exchange. Also, the Authority should recover from such former
director an amount equivalent to two times the amount of the benefit accruing
to him by reason of the breach and levy financial penalties in such terms as
the Authority may prescribe.
2.4 THE COMPANIES ACT
The
Companies Act provide for the duties and responsibilities of the directors which
are basically governed by common law. These duties are the duty of care and
skill, and the duty of loyalty. The duty of care and skill ensures that the
director acts in good faith and that there is no conflict of interest in that
there is no overlap between the personal interests of the directors and their
role as the manager of the company. Failure to observe above duties is a
violation of the code of corporate governance and an action can be taken
against the violating director either through civil or criminal sanctions.
Section
45(1) (b) provides that every person who has authorized himself to be named and
is named in the prospectus as a director or as having agreed to become a
director either immediately or after an interval of time; will be liable in a
civil action for the untrue statements in the prospectus. This ensures that the
directors are accountable for their actions. Even though sections 45 of the
Companies Act provides for personal liability of the director misstatements in
companies prospectus, it provides for many defences which can make the director
escape liability. It gives them a leeway
by stating that where the prospectus was issued without their consent, or in
case where they withdrew their consent or even inrelying on a public document,
they will then be exempted from liability of misstatement in the company’s
prospectus. This means, then, the director can escape liability by relying on a
public documents containing untrue statements provided he gives a fair
representation of untrue statement. Therefore, the Act should be amended to the
extent that it allows this loophole.
Section
188(1) of the Actwhich deals with the
appointment of the company’s director provides that if any person who has been
declared bankrupt or insolvent by a competent court in Kenya or elsewhere and
has not received his discharge acts as director of, or directly or indirectly
takes part in or is concerned in the management of, any company except with the
leave of the court, he shall be liable to imprisonment for a term not exceeding
two years or to a fine not exceeding ten thousand shillings or to both. This
clearly means that a person who is bankrupt can manage the affairs of a company
with leave of the court. Leave can be granted by a court of questionable
independence or through fraud. This will work against development of corporate
governance. Also, with the same spirit, section 189 goes a notch higher by
providing that the court can only bar the appointment of an individual from
becoming a director of a company for not more than five years. This implies that directors who have been
involved in serious scandals likethe Goldenberg and Anglo-leasing can be barred
from management of a company’s affairs for not more than five year. These
sections should be reviewed to increase punishment and the period the court can
bar an individual from managing the affairs of the company respectively.
Further,
section 402 (1)of the Act states that if in any proceeding for negligence,
default, breach of duty or breach of trust against an officer of a company or a
person employed by a company as auditor (whether he is or is not an officer of
the company) it appears to the court hearing the case that that officer or
person is or may be liable in respect of the negligence, default, breach of
duty or breach of trust, but that he has acted honestly and reasonably, and that,
having regard to all the circumstances of the case, including those connected
with his appointment, he ought fairly to be excused for the negligence,
default, breach of duty or breach of trust that court may relieve him, either
wholly or partly, from his liability on such terms as the court may think fit.
This has the effect of making inexperience and ignorance a defence. This
subjective test of directors’ liability needs review.
2.5 THE PENAL CODE
The
Penal Code at section 329, chapter 63 laws of Kenya,provides for an
imprisonment for seven years for a director who had been found liable for
issuing fraudulent information in the company’s prospectus with intent to
induce to deceive or to defraud any member, shareholder or creditor of the
corporation or company. This is a good provision however there is a challenge
given that the fact that prosecution fraud cases in Kenya is highly selective
and only takes place in high-profile cases where there is political interest,
such as the Goldenberg case and the Anglo-leasing scandal. Also, lack of
political will interfere with prosecution of cases. The politics manifested
itself when President Uhuru Kenyatta authorized the payment of Ksh. 1.4 billion
Anglo-Leasing debt[8].
This illustrates the negative effect politics and want of prosecutions on
corporate governance.
3 COMPARATIVE ANALYSIS WITH OTHER JURISDICTIONS
3.1 THE KING CODE OF GOVERNANCE FOR SOUTH AFRICA (KING III), 2009
The
code came into effect on March 1, 2010. It was later amended to align it with
the South Africa Companies Act No. 71 of 2008 as amended by Companies Amendment
Act 3 of 2011. The King III Code follows the “stakeholder inclusive” model, in
which the board of directors should uphold the interests and expectations of
the shareholders, which is the best interest of the company.The code also
allows for alternative dispute resolution which includes negotiation,
mediation, and expedited arbitration as dispute resolution mechanisms[9].
3.2 THE US SARBANES-OXLEY ACT OF 2002
The Act was passed in 2002 to protect investors from
the possibility of fraudulent activities in the financial market sector. Many
corporations were being involved in fraudulent accounting activities and the
Act was enacted to curb this practice. The Act introduced strict reforms to
enhance financial disclosures from the corporations and prevent fraud. Its
enactment was in response to scandals such as Enron and Tyco which left
financial investors trembling.
Section 802 of the Act criminalizes the destruction
of corporate audit records. The section also empowers the
Securities and Exchange Commission to promulgate such rules and regulations, as
are reasonably necessary, relating to the retention of relevant records such as
work papers, documents that form the basis of an audit or review, memoranda,
correspondence, communications, other documents, and records (including
electronic records) which are created, sent, or received in connection with an
audit or review and contain conclusions, opinions, analyses, or financial data
relating to such an audit or review, which is conducted by any accountant who
conducts an audit of an issuer of securities to which section 10A(a)[10]
of the Securities Exchange Act of 1934 applies. Any person who knowingly and
willfully violates subsection (a)(1), or any rule or regulation promulgated by
the Securities and Exchange Commission under subsection (a)(2), shall be fined
or imprisoned for not more than 10 years, or both.
Section 906 of the Act provides for corporate
responsibility for financial reports. The section obliges the corporate
officers to certify financial reports. Each periodic report
containing financial statements filed by an issuer with the Securities Exchange
Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of
1934 shall be accompanied by a written statement by the chief executive officer
and chief financial officer (or equivalent thereof) of the issuer[11].
Section 906(b) provides that the statement required under subsection (a) shall
certify that the periodic report containing the financial statements fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act 934. Any person certifying any statement as set forth in
subsections (a) and (b) of this section knowing that the periodic report
accompanying the statement does not comport with all the requirements set forth
in this section shall be fined not more than $1,000,000 or imprisoned not more
than 10 years, or both.
3.3 THE US DODD-FRANK ACT OF 2010
The
Act authorizes monetary awards to whistleblowers providing the Securities
Exchange Commission with information that leads to a successful enforcement
action. Confidential information
supplied to the regulator by a whistleblower may be furnished to other
appropriate regulatory authorities, the Attorney General of the United States,
others, at the discretion of the Securities Exchange Commission. This is an
aspect which Kenya needs to follow from the US.
The
current corporate governance code lacks this provision. The proposed code
provides that the Board should disclose the Company’s Whistle Blowing Policy on
its annual report and website[12].
This provision is a step forward in the development of the financial markets in
Kenya
4 SUGGESTED REFORMS
Currently,
the Kenyan laws on corporate governance employ the subjective test in
establishing the directors’ liability. This makes the directors to use the
defence of ignorance and lack of experience to escape liability. There is a
strong need to review Kenya's law on director liability to reflect a dual
standard of liability with both objective and subjective standards of liability
since the current system works to shareholders’ detriment since they don’t have
an effective control over the choice of directors. This dual test has been
employed in most jurisdictions including the United Kingdom[13].
Another
suggestion for reform is with respect to the Guidelines on Corporate Governance
Practices by Public Listed Companies in Kenya. The Capital Markets Authority
has released a proposed Code of
Corporate Governance Practices for Public Listed Companies in Kenya[14]. The CMA seeks to limit the number of
directorships an individual can hold in public companies to three. The
guidelines in place allow the directors of public listed companies to hold up
to five board positions thus the guideline is seen to encourage in-breeding and
cartel-like arrangements in corporate governance. Individuals serving as chief executives of
public listed companies will sit in the board of only one other company[15].
5 TRENDS IN CORPORATE GOVERNANCE
5.1 THE COMPANIES BILL, 2014
The
Companies Bill, 2014 has elaborate provisions on the duties and liabilities of former
and present directors[16].Section
144 of the Bill provides that a director of a company shall (a) act in
accordance with the constitution ofthe company; and (b) only exercise powers
for the purposes forwhich they are conferred. The Bill has also introduced the
dual test on the director’s liability. In performing the functions of a
director, director of a company shall exercise the same care, skill and diligence
that would be exercisable by a reasonablydiligent person with:
a) the
general knowledge, skill andexperience that may reasonably beexpected of a person carrying out the
functions performed by the director in relation to the company; and
b) the
general knowledge, skill andexperience that the director has[17].
5.2 THE PROPOSED CODE OF CORPORATE GOVERNANCE PRACTICES FOR PUBLIC LISTED COMPANIES IN KENYA, 2014
This Code is issued under sections 11(3) (v)
and 12 of the Capital Markets Act Cap 485A. It will apply to all companies
listed in the Nairobi Securities Exchange (NSE). The code is intended to
provide the minimum standards required from shareholders, directors, chief
executive officers and management of a listed company so as to promote high
standards of conduct as well as ensure that they exercise their duties and
responsibilities with clarity, assurance and effectiveness[18].
The 2014 framework has moved away from the “Comply or Explain” approach to
“Apply or Explain” approach. The Board should “apply” all the recommendations
made in the Code of Corporate Governance explicitly or “explain” why they
cannot apply the recommendations and state steps to be taken to get to
compliance.
Recommendation 1.1.2 of the code establishes
the Nominating Committee. The Board should appoint a Nominating
Committee consisting mainly of independent and non-executive Board members with
the responsibility of proposing new nominees for appointment to the Board and
for assessing the performance and effectiveness of the directors of the Company.
The terms of Board members should be managed in order to ensure a smooth
transition and there should be a succession plan for top Management[19].
Another aspect of development in the proposed code is on the issue of multiple
directorships. The Guideline provide that every person except a corporate
director who is a director of a listed company shall not hold such position in
more than three public listed companies at any one time to ensure effective
participation in the Board. In a case where the corporate director has
appointed an alternate director, the appointment of such alternate shall be
restricted to two public listed companies at any one time. An executive or
managing director of a listed company shall be restricted to one other
directorship of another listed company[20].
This marks a shift from the current guidelines which allow the directors of public listed companies to hold up to five board
positions thus encouraging in-breeding and cartel-like arrangements in
corporate governance. Individuals serving
as chief executives of public listed companies will sit in the board of only
one other company[21].
6 CONCLUSION
Initially,
companies were reluctant at investing in corporate governance. But with
increase in financial crises, for example, the crisis leading to the Cadbury
Report, 1992, the 2008 global financial crisis, most institutions started to
see the need for investing in corporate governance[22].
Good corporate governance improves the performance of the securities market.
The
current corporate governance system is unsatisfactory as it concentrates more
on regulatory corporate governance whose enforcement is sometimes questionable.
This is because of the weak enforcement agencies and lack of a robust
enforcement regime. There should be an overlap between the regulatory corporate
governance and the voluntary corporate governance. But it is apparent from the
trends above the Capital Markets Authority is proposing a code which focuses on
voluntary corporate governance whereas the Companies Bill is providing complex
provisions on regulatory corporate governance. These divergent ideologies
should be harmonized so to come up with an all-embracing corporate governance
regime.
END NOTES
[1] The Cadbury Report 1992, Financial Aspects of Corporate Governance
[2]Principles for Corporate Governance in Kenya
and a Sample Code of Best Practice for Corporate Governance Prepared
by: Private Sector Initiative for Corporate Governance
[3] Section
1.2 of The Guidelines on Corporate Governance Practices by Public Listed Companies
in Kenya
[4] Capital
Markets Authority Annual Report 2013 P. 83
[5]
Civil Appeal No. 92 of 2014. In this case the Court of Appeal stated that section
11(w) of the Capital Markets Act is akin to section 3A and 3B of the Appellate
Jurisdiction Act, the so-called ‘oxygen rule.’
[6]High Court
Petition No. 600 of 2013, Ruling No. 2
[8] Page 3:
The Standard Newspaper of Friday, May 16, 2014
[9]
Principle 8.6 of the Corporate and
Commercial/King Report on Governance for South Africa – 2009
[10]
The section provides that each audit required pursuant to this title ofthe
financial statements of an issuer by a registered public accountingfirm shall
include, in accordance with generally acceptedauditing standards, as may be
modified or supplemented from timeto time by the Commission—
i.
procedures designed to provide reasonable
assurance ofdetecting illegal acts that would have a direct and material
effecton the determination of financial statement amounts;
ii.
procedures designed to identify related party
transactionsthat are material to the financial statements or otherwiserequire
disclosure therein; and
iii.
an evaluation of whether there is substantial
doubtabout the ability of the issuer to continue as a going concernduring the
ensuing fiscal year.
[11]
Section 906 (a) supra
[12]Recommendation
6.1.1 of the Code of Corporate
Governance Practices for Public Listed Companies in Kenya, 2014
[13]
This test is provided in in Section 174(2) of the United Kingdom's Companies
Act 2006. It requires the directors to exercise must exercise the care, skill
and diligence that would be exercised by a reasonably diligent person with both
the general knowledge, skill and experience that may reasonably be expected of
a person carrying out the same functions as the director in relation to that
company, and the general knowledge and skill that the director actually has.
[14] Standard
Digital News of May 20, 2014
[15] Section 6
of the Code of Corporate Governance
Practices for Public Listed Companies in Kenya;
Selected Mandatory Requirements provide that:-
i.
A director of a listed company other than a
corporate director shall not be a director in more than three public listed
companies at any one time.
ii.
Where a corporate director has appointed an
alternate director, the appointment of such alternate shall be restricted to
two public listed companies at any one time.
iii.
An executive or managing director of a listed
company shall be restricted to one other directorship of another listed
company.
[16]
Section 142 of the Companies Bill, 2014
[17]
Section 147 supra
[18]
This the purpose of the Proposed Code
of Corporate Governance Practices for Public Listed Companies in Kenya, 2014
[19]Recommendation
1.1.8of the code provides for succession planning.
[20]
Recommendation 1.1.6 on multiple directorships states that there should be a
limit to the number of directorships a Board member should hold.
[21] Section 6
of the Proposed Code of Corporate
Governance Practices for Public Listed Companies in Kenya;
Selected Mandatory Requirements provide that:-
iv.
A director of a listed company other than a
corporate director shall not be a director in more than three public listed
companies at any one time.
v.
Where a corporate director has appointed an
alternate director, the appointment of such alternate shall be restricted to
two public listed companies at any one time.
vi.
An executive or managing director of a listed
company shall be restricted to one other directorship of another listed
company.
[22]
This move to embrace the code of conduct in management of business affairs is
captured in the inventory of October 24, 1999, the Global Corporate Governance
Forum Secretariat published the 2nd Edition of “The Inventory: A survey of
Worldwide Corporate Governance Activity” in which it notes on page 36:
“At a global level, the survey responses indicate
that . . . companies in these emerging markets, traditionally unwilling to pay
for corporate governance-related services, now understand the importance of
changing their Board and disclosure practices in order to better attract
international sources of capital…”
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- Donaldson, T. And L.E Preston (1995), “The Stakeholder Theory of the Corporation: Concepts,Evidence, and Implications,” Academy of Management Review, 20, 1.
- Financial Reporting Council. (2010, June). The UK Corporate Governance Code.
- Freeman, R.E (1984), “Strategic Management: A Stakeholder Approach”, Pitman Boston.
- Government of the Republic of Kenya. (2007). Kenya Vision 2030.
- Kenya Law Reports. (2010). The Constitution of Kenya. Article 10. P. 15.
- King III – “Draft Code of Governance Principles for South Africa – 2009,” King Committee onGovernance.
- Laws of Kenya. (2014). Companies Bill.
- Laws of Kenya. (2014). The Companies Act. In Chapter 486. National Council for Law
- The Capital Markets Act. (2013). The Capital Markets (Corporate Governance) (MarketIntermediaries) Regulations. Kenya.
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